‘‘No Federal reserve bank, the Board, the Secretary of the Treasury, any other agency, or any entity directed to act on behalf of the Federal reserve bank, the Board, the Secretary, or other agency, may mint or issue a central bank digital currency . . .”
These words in a bill proposed by Senators Mike Lee (R-UT) and Mike Braun (R-IN) is the statutory equivalent to Shakespeare or Goethe. Americans of every political stripe should hear these words like legal poetry and rally around the ‘No Central Bank Digital Currency (CBDC) Act.’ CBDCs would end Americans’ financial freedom and prompt inevitable confiscatory policies by the U.S. Treasury.
Cabining the CBDC authorizing debate in Congress is the first step to stopping this financial Road to Serfdom. This should be obvious. The Constitution’s Article I gives Congress exclusive authority over coining money. A power affirmed by the Supreme Court. Both Federal Reserve Chair Jerome Powell and Vice Chair Lael Powell have ceded in testimony the need for a congressional authorizing act. The Federal Reserve as a body did as well in a January 2022 report: “The Federal Reserve does not intend to proceed with issuance of a CBDC without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law.”
Stopping CBDCs means stopping DOJ workarounds
Yet according to Rep. Tom Emmer (R-MN) the Biden Administration has devised a workaround they refuse to share with Congress. This provoked House Republicans to write Attorney General Merrick Garland requesting DOJ’s “assessment of whether legislative changes would be necessary to issue a CBDC” by October 15.
The executive seems to be playing from last year’s playbook for potential stablecoin regulation. There it suggested the Financial Services Oversight Council produce regulations by fiat if Congress did not pass a bill. The go-it-alone strategy may be too tempting for a government seeking ever tighter controls over Americans’ financial lives. For regulators CBDCs are the Holy Grail as expressed by global financial regulator Agustin Carstens in 2020:
We don’t know who’s using a $100 bill today and we don’t know who’s using a 1,000 peso bill today. The key difference with the CBDC is the central bank will have absolute control on the rules and regulations that will determine the use of that expression of central bank liability, and also we will have the technology to enforce that.
Alternatives may quickly find themselves banned as Mr. Powell has stated: “You wouldn’t need stablecoins; you wouldn’t need cryptocurrencies, if you had a digital U.S. currency . . . I think that’s one of the stronger arguments in its favor.”
Stopping CBDCs means less government power
Why is the administration pushing so hard for CBDCs? Researcher Natalie Smolenski provides the answers in a recent and well-received report published by the Bitcoin Policy Institute. First as stated CBDCs give regulators a complete record of all financial transactions thus eliminating transactional privacy. They claim total surveillance is required to stop terrorists and money launderers even though empirical evidence debunks that claim. Second, once CBDCs become widely used they transform into an instant tool for monetary policy. The U.S. now owes $31 trillion dollars. Congress has already allocated funds for 87,000 new IRS agents to unleash audit-palooza on Americans. CBDCs would eliminate the middleman by giving Treasury access to all the U.S. stock of digital cash. With this control the Fed could place negative interest rates on all CBDC holdings allowing Treasury to collect money without passing unpopular tax hikes. People would have no choice but to spend their savings or watch it vanish in real time. China is already doing this with its CBDC.
We must stop CBDCs before they gain traction
This is not financial system Americans signed up for. As I wrote in Central Bank Digital Currencies Threaten Global Stability and Financial Privacy, the supposed benefits CBDC proponents proffer will likely never materialize. Yet the threats to individual sovereignty and the invitation for abuse are practically baked in. Two senators have proposed an end to this terrible policy. As Shakespeare might put it, ‘Friends, Americans, Countrymen, lend me your ears, support the No CBDC Act!’
Hot summer temperatures have done nothing for the current “crypto winter” which has seen a $2 trillion market drop from highs last year. The downswing, including the spectacular failure of the Terra Luna ecosystem and a cascade of exchanges temporarily halting withdrawals, has livened crypto’s critics including governmental bodies and their academic allies.
Whilst the crypto industry should ignore the bluster as it recalibrates, it should also accept legitimate criticisms. The crypto revolution has just begun, and tough battles lay ahead. But ultimately those screaming “Get a horse” at crypto’s teetering auto will be proven wrong.
The first rejoinder to the crypto collapse is governments bear much responsibility. The trillions printed out of thin air recently had to go somewhere. Crypto with its general positive returns were as good a place as any. Low interests rates meant safer alternatives were not feasible.
As Mati Greenspan, the CEO of crypto research and investment firm Quantum Economics told CNBC. “Central banks were very quick to print gobs of money when it wasn’t needed, which led to excessive risk taking and reckless build up of leverage in the system.” Cheap money meant millions poured into untested concepts and undeserving projects. Existing business models that seemed solid are facing collapse and rethinking. Of course, crypto is not the only victim of government profligacy. The S&P is heading towards its worst first half since 1970 as recession fears loom.
Crypto has just begun to clean up government’s mess
The government-caused monetary bubble will wreak havoc on the industry short term. But afterward exposing weak business models will strengthen the industry. More investment discipline and exacting due diligence will benefit project developers and consumers. Bear markets usually beget stronger design and more solid plans as focus on short term gains wane. Some innovations will focus more on consumer value.
Nonfungible Tokens (NFTs) have a bright future in strengthening the relationship between entertainers and their fans and businesses and their customers through personalized experiences. Nouveau riche indulgences on jpeg art may be less sustainable.
Yet the crypto industry also bears responsibility for the current opening critics have seized. Over exuberance that imbibes any new technology foments overreach. Millions in venture capital poured into Terra Luna despite an untested design clearly unable to sustain a market downturn. Scammers abound and the industry should help push them out—46,000 people have reportedly lost $1 billion since the start of last year.
Hacks and inside-job rug pulls have exposed the general lack of focus on network security.
The future will see bigger battles. Enthusiasts’ zeal for decentralization and censorship resistance will collide with venture capitalists seeking control and return on the investment. Environmental, Social, Governance (ESG) advocates that have so effectively captured public companies have crypto in their sights. They currently direct their ire at crypto’s energy use but social factors are percolating. The crypto industry should not sugarcoat the viscous battles ahead.
Crypto has just begun to improve our lives
Yet crypto’s future is bright. It’s current omnipresence in media and government attention belies how young the industry still is. Ten years ago, the price of Bitcoin was $15.40. Crypto’s current market cap is half that of Apple and less than one-twentieth of U.S. GDP. Current growing pains will not deter the long-term innovations.
At its heart crypto is a way to hold and transfer value outside the prying eyes of the state. The idea of people exchanging value electronically outside the heavily regulated and in some places authoritarian financial systems already benefits the world as people in the direst circumstances have already discovered. Other individual-centered innovations will arise from this core concept in ways not yet imagined, just as mobile phones disrupting the taxi industry at one time seemed farfetched.
Critics including the post-WWII global financial superstructure insists this is all dangerous, unnecessary, or a Ponzi scheme it must protect us from. China and Canada to give just two examples show self-interest is the real aim. The crypto industry must answer legitimate criticisms and gear for the looming battles. But ignore the current naysayers shouting insults from their equine transport.
The crypto world is recoiling under massive headwinds. Regulatory uncertainty and the current market downturn, including the spectacular crash of TerraUSD, has left the industry reeling. But while market corrections can shakeout unworthy projects and redirect capital more efficiently, unclear guidance about the rules is intransigent. Myopic federal guidance, particularly from the Securities and Exchange Commission (SEC) has hamstrung crypto development for years and hopes for a resolution exist but seem dim. Now the SEC kills crypto.
It didn’t have to be this way.
Four years ago this week, SEC Corporation and Finance Director Bill Hinman spoke at a San Francisco crypto summit and offered a path forward. Recognizing the emerging industry’s potential entanglement with securities laws, Hinman asked, “Can a digital asset that was originally offered in a securities offering ever be later sold in a manner that does not constitute an offering of a security?”
He tentatively said yes, if the project was sufficiently decentralized. “If the network on which the token or coin is to function is sufficiently decentralized – where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts – the assets may not represent an investment contract [security].”
Hinman halted the SEC killing crypto
Developers rejoiced dubbing his remarks the “Hinman Test.” Decentralization can be a messy concept that needs further clarity. But Hinman seemed to offer a way forward that captured crypto’s peer-to-peer ethos while prosecuting fraud.
Four years hence, crypto’s rules are less certain than ever and Hinman’s words are the subject of a vicious legal battle. The hope for a straightforward regulatory pathway for crypto is all but forgotten.
Even amid Hinman’s speech, then-SEC Chair Jay Clayton’s tenure lacked focus. A year after the Hinman Test, the SEC produced further crypto “guidance” so impenetrable Commissioner Hester Peirce likened it to a Jackson Pollock painting. Clayton also greenlit the Ripple/XRP litigation on his last day, which has become the SEC’s most arduous crypto battle.
Current Chair Gary Gensler has replaced Clayton’s vacillation with outright hostility. Gensler has unleashed a torrent of legal actions against crypto project developers like LBRY and doubled down on the Ripple case,projects with happy user bases and no hint of fraud. He’s called for plenary authority over crypto and hired scores more attorneys to evaluate each project under the vague and famously malleable Howey test. And he’s threatened virtual marketplaces like Coinbase, while forcing BlockFi and Celsius into fines and settlements to avoid protracted legal battles.
Gensler’s SEC kills crypto
Cynics claim Gensler’s “enforcement only” approach and attendant industry ire is worth the trouble to bolster his profile for ever higher government posts. Regardless of motivation, the results have immensely damaged this century’s most promising technology.
Observers inside and outside the Commission have offered alternatives to the Clayton-Gensler quagmire. Commissioner Peirce has suggested a regulatory sandbox. Academics have offered various solutions including a state-led regime. Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) proffered a legislative solution. None seem likely to be enacted soon.
For now, the judiciary offers the only refuge from the SEC’s regulatory onslaught. Ripple along with individual defendants Brad Garlinghouse and Christian Larsen have cornered the SEC into unforced errors and shifting justifications as discovery battles intensify before trial.
Ripple case shows SEC crypto hostility
Most prominently, the SEC’s turn from Hinman’s speech and the SEC’s unwillingness to reveal the intra-office machinations surrounding it has begot Amber Heard-like court performances. Magistrate Judge Sarah Netburn has grown increasingly frustrated with the SEC’s obduracy.
At one point during a hearing last week she sarcastically directed the SEC lawyer to pull up the speech and explain which parts were Hinman’s personal opinion and which were SEC policy, as the commission darts to-and-fro to avoid yielding information to opposing counsel.
Ripple has the resources to fight a protracted battle that may end at the Supreme Court. The Commission rarely faces spirited opposition, as years-long investigations followed by expensive litigation crush adversaries well before a ruling on the merits.
SEC is losing Ripple crypto case
For once the SEC seems to have the losing hand and not just in the Ripple litigation. Mr. Gensler’s reportedly abrasive style has caused a mass exodus of top-level personnel. The Fifth Circuit recently ruled its administrative law judge system of adjudication that denies defendants a federal court venue is unconstitutional in certain circumstances.
For the crypto world building the next generation economy, the SEC’s troubles are its gain. The industry should use the Crypto Winter to exert maximum pressure on Gensler. Reviving the Hinman Test – and actually applying it consistently – would be a start.
The much-hyped “crypto winter” has emboldened cryptocurrency critics. The usual charges of “Ponzi scheme” (Robert Reich) and “The Big Scam” (Paul Krugman) have returned, more pointed this time. Governments, keen to never let a crisis go to waste, have joined in. One Chinese official, echoing Reich, recently called crypto “The Biggest Ponzi Scheme in History.”
Amid the gloom, some positive news emerged from the United Kingdom. The UK Treasury will not require suffocating anti-money laundering rules for crypto transfers between unhosted (self-custodied) digital wallets unless a valid reason exists. In the current hyperbole-filled zeitgeist, in which investor protection virtue signaling carries the day, the UK’s measured approach is welcome. After originally proposing to require these rules, the UK Treasury asked for public comment—and actually listened to the responses.
In light of this feedback, the government has modified its proposals with regard to unhosted wallets. Instead of requiring the collection of beneficiary and originator information for all unhosted wallet transfers, cryptoasset businesses will only be expected to collect this information for transactions identified as posing an elevated risk of illicit finance. … The government does not agree that unhosted wallet transactions should automatically be viewed as higher risk; many persons who hold cryptoassets for legitimate purposes use unhosted wallets due to their customisability and potential security advantages (e.g. cold wallet storage), and there is not good evidence that unhosted wallets present a disproportionate risk of being used in illicit finance.
UK leads on crypto privacy but EU lags behind
The UK’s approach contrasts with that of its cross-channel neighbors. European citizens are worried about government snooping, as shown by a three-month European Central Bank survey that listed privacy as the biggest concern for a digital euro. Yet, in March, European Union lawmakers voted to scrap all privacy protections for crypto-related transactions, including via unhosted wallets. Thus, someone in Hamburg sending one Satoshi (a cryptocurrency unit equivalent to a 100 millionth of a bitcoin) to someone in Calais would have the same reporting requirements as someone placing 10 bitcoins (worth $232,909 as of this writing) at the current exchange rate quoted on Yahoo! Finance) on a centralized exchange.
Global Financial Regulators trail UK on crypto privacy
Authorities justify their incessant calls for granular reporting to deter illegal activity. Never mind that the blockchain’s pseudonymous nature already enhances transaction traceability. In fact, an April 2021 report from the Bank for International Settlements (the global central banking authority) coauthored by a U.S. Treasury official suggested an alternative explanation:
There is an opportunity to adopt new approaches that take advantage of the inherently data-rich nature of the cryptoasset sector. … New supervisory methods … should allow … more intensive use of data and technological tools like blockchain analytics to improve the effectiveness of their supervisory frameworks.
Many global financial regulators want to integrate the public nature of blockchain transactions to enhance their already granular monitoring of people’s personal finances, even when there isn’t a hint of suspicious activity.
ESG and CBDCs kill crypto privacy
This level of government intrusion combined with environmental, social, and governance, or ESG, measures places Western governments in a position to go beyond stopping illegal transactions to control virtually all transactions. Authorities could do this either through the above practices or by introducing central bank digital currencies (CBDCs)—digital versions of fiat currencies that mimic some aspects of crypto currencies while remaining controlled by the state. The Chinese government has led the CBDC charge with its digital yuan (e-CNY). Is stopping an estimated $11 billion in illegal activity worth the complete loss of our financial privacy and the surrendering of our financial privacy in favor of Chinese-like authoritarianism?
The UK has shown true vision in promoting some degree of financial privacy in the crypto market. The U.S. should follow its lead. As Jerry Brito of Coin Center stated at a recent Federalist Society event, unhosted wallets do not implicate anti-money laundering laws because they don’t involve third-party financial institutions. All governments should take this view. One at least, already seems to be heading in the right direction.
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