The good news is that a Republican congressman who believes in the financial liberty afforded by cryptocurrency is interim speaker of the House and might put legislation preventing regulatory overkill on a faster track. The bad news is that the disparity within the Biden administration over what crypto actually is—a security? a commodity? an exotic new element foreign to this planet?—could be the chaos that prefigures constriction.
House Financial Services Committee Chairman Patrick McHenry of North Carolina was handed the gavel as speaker pro tempore until such time as the House of Representatives’ razor-thin GOP majority chooses a successor to ousted Rep. Kevin McCarthy of California. Mr. McHenry has long been pushing bills that would provide some overdue regulatory clarity for digital assets, his tenet being that they are an innovation that poses “a major political and economic question” that only Congress should decide.
The much-gloated-over Republican civil war may not end up being as destabilizing to wealth as the divide between Commodity Futures Trading Commission (CFTC) Chairman Rostin Behnam, who called on Congress to enact explicit rules giving his agency regulatory power over cryptocurrency assets, and Securities and Exchange Commission (SEC) Chairman Gary Gensler, who defends the status quo with an eye toward perpetual heavy-handed SEC purview over the industry.
The ex-Goldman Sachs partner wants crypto markets to register with the SEC as if they were stock exchanges. The SEC considers the cryptocurrency purchase platform Coinbase, for instance, to be an unregistered securities exchange, and Coinbase is fighting the regulatory body in court. As a publicly traded company, Coinbase is already under the SEC’s eye, but that isn’t enough for the expansionist Mr. Gensler.
Crypto isn’t a top priority for the veteran of the Clinton and Obama administrations, though it might be close to it. With traders turning increasingly to private equity markets, Mr. Gensler intends to upend long-standing trading orthodoxies on the New York Stock Exchange and Nasdaq via radical new pricing rules, inflict new intrusiveness upon brokerages’ activities, and increase the trading conducted on the public exchanges from which investors have fled. Add to that forcing public firms to devote valuable resources to determining and disclosing their carbon footprint.
Testifying to Mr. McHenry’s committee late last month, Mr. Gensler, who ran the CFTC under President Barack Obama, couldn’t settle on whether Bitcoin is a security or a commodity, a dance that turned farcical when Rep. Ritchie Torres (D-N.Y.) asked the SEC chief whether trading Pokémon cards was a securities transaction. He responded that it depends on whether the trade would pass the U.S. Supreme Court’s 1946 Howey Test on the expectation of profits. (The Howey Test refers to determining whether a transaction qualifies as an “investment contract.”)
If practicing the hobby of trading cards can elicit scrutiny from a federal regulatory bureaucracy, it’s hard to imagine any personal financial activity being off limits. But contrary to his testimony, Mr. Gensler is on record arguing that cryptocurrency is, in fact, a security that the SEC is entitled to scrutinize because of that same Howey Test, “because there’s a group in the middle and the public is anticipating profits based on that group,” as Mr. Gensler said in a decidedly friendly magazine interview in February.
Even that interviewer gleaned that Mr. Gensler and the rest of the Biden administration are at nothing less than war with cryptocurrency and the freedom from government it provides. The SEC’s “unstated premise,” legal reporter Ankush Khardori surmised, “appears to be that if the government can broadly stigmatize the industry and market participants, then ordinary people ... might think long and hard about whether to hold these assets in any form.”
On another front in that war, in January, the Federal Reserve, the Federal Deposit Insurance Corp., and the Comptroller of the Currency jointly issued an ominous memo pulverizing cryptocurrency with an extensive list of “key risks” it purportedly poses to the more than 50 million Americans holding crypto assets in some form. While conceding that “banking organizations are neither prohibited nor discouraged from providing banking services to customers of any specific class or type” under the law, it slyly warned that “the agencies believe that issuing or holding as principal crypto-assets that are issued, stored, or transferred on an open, public, and/or decentralized network, or similar system is highly likely to be inconsistent with safe and sound banking practices.”
This conflict between the heavy hand of government and financial liberation through technological innovation was described with great prescience by economist Richard Rahn in 1999 in his book “The End of Money and the Struggle for Financial Privacy,” published by the Discovery Institute. Mr. Rahn predicted most money being issued privately and digitally rather than by governments, with direct electronic transfer from individual to individual of any asset a reliable financial institution guarantees. With digital cash conquering monetary instability and inflation by going over the head of government, standards of living would be elevated.
But such a happier new world poses a threat to government power and, according to Mr. Rahn more than two decades ago, will fail to materialize if people are prohibited from moving wealth internationally by private digital means.
Twenty years after that stirring premonition, Mr. Rahn wrote, “One of the basic points with cryptocurrencies is to make it very difficult for the government to know who has them, how much, and to identify what is bought and sold with them.” As the ultimate result of this financial emancipation, “a true global, largely unregulated and untaxed economy will emerge to operate in parallel with the wreckage of the remains of the government-monopoly-money statist economies.”
That “reality that might be” is a tempting counterbalance as Mr. Gensler and other regulators scare the public with horror stories of disgraced FTX founder Sam Bankman-Fried’s abusing the novel nature of cryptocurrency to line his pockets and seek sweet deals from federal regulators—engineered by his topping the list of the most profligate donors to a regulation-loving Democratic Party.
