This political risk brief is a joint product of Baron Public Affairs and Wescott Capital.

Introduction

Any cryptocurrency threatening the primacy of the dollar or the U.S. government’s ability to borrow without limit invites a harsh regulatory and legislative response.  By appearing to challenge government’s authority, Bitcoin, Ether, or any other digital asset could prove too innovative for its own good.  Regarding this point, Bridgewater Associates founder Ray Dalio recently commented, “[Crypto’s] own biggest risk is its success, because … no government wants to have an alternative currency.”¹

To avert devastating policy responses, crypto enterprises and advocates must meet three core standards central to securing political viability: operating in accordance with, and not external to, government; improving or at least not detracting from the nation’s fiscal condition and economic growth; and enhancing America’s position in the Great Power competition with China.

Failure on any of the above would expose the crypto-powered blockchain sector to attacks from established policy makers, financial industry incumbents, and rising populists.  The mounting issues forcing a reckoning include:

– The response of the Internal Revenue Service to tax evasion and other illegal conduct facilitated by crypto;

– The determination of agency jurisdiction over different types of crypto, particularly the definition of a security;

– Crypto’s environmental impact, particularly the variation in energy consumption among different cryptocurrencies;

– Terror financing and money laundering guidelines established by intergovernmental entities – for example, the Bank for International Settlements – and independent U.S. agencies, such as the Federal Deposit Insurance Corporation; and

– Ransomware attacks that utilize crypto’s relative anonymity and non-tangibility as a core component of their execution.

Conflict within the Biden Administration

As it must with many policy areas, the Biden Administration must manage tensions surrounding crypto by balancing the demands of the Clinton-era Democratic Party establishment and a rising reformist Left.  The Administration’s most notable crypto skeptic has been Treasury Secretary Janet Yellen, who concerning Bitcoin recently said, “It’s an extremely inefficient way of conducting transactions, and the amount of energy that’s consumed in processing those transactions is staggering.”²  Secretary Yellen even has alluded to supporting a Central Bank Digital Currency, which would undermine a core attribute of crypto by creating a centralized, state-administered alternative.³  Others in the Administration and key Biden campaign supporters appear more supportive, although they have not revealed specific approaches that address the core criticisms of crypto.⁴  If everyone from cautious supporters to ardent crypto table-pounders continues to delay in proposing a clear and compelling regulatory framework, the skeptics will have a sizeable – perhaps insurmountable – advantage as the policy debate enters a critical period.

Crypto Delenda Est? Emerging Populist Views

Beyond the Administration, crypto remains a subject of ongoing debate within the populist factions on the Left and Right increasingly driving the policy debate. U.S.-China competition, growing skepticism of major corporations, and the younger generation’s lack of faith in government are the themes that will shape the debate.

The Right

As 1980s-era “market fundamentalism” loses favor in a Trump-dominated GOP, libertarian cheerleaders – such as Securities and Exchange Commission (SEC) Commissioner Hester Peirce, the “Crypto Mom” – will struggle to define the Republican Party’s policy approach.⁵  While some members of the GOP have embraced the free-market benefits of crypto, a broader coalition rooted in prevailing in the U.S.-China competition will be necessary to secure right-of-center support for crypto.

Peter Thiel’s recent description of Bitcoin as a “Chinese financial weapon” reflects a growing perception on the Right of crypto as the next front in the contest between Washington, D.C. and Beijing.⁶  Pro-Trump commentary website American Greatness has warned, for example, that “either the U.S. leads on crypto, or China will.”⁷  Other conservatives, such as Senator Tom Cotton (R-AR), fear that crypto will undermine the dollar, damaging the United States’ international position to the benefit of China: “Maintaining the dollar’s supremacy is not only an economic matter, it is a critical strategic matter as well.”⁸  During a hearing last year, Senator Cotton remarked, “The U.S. needs a digital dollar.  The U.S. dollar has to keep earning that place in the global payments system. It has to be better than Bitcoin. … It has to be better than a digital yuan.”⁹

Domestically, as the affection of the Republican Party has moved from coastal boardrooms to the heartland, Red states, such as Wyoming, Montana, South Dakota, and Oklahoma, have developed policies to support crypto; Republican Mayor of Miami Francis Suarez has set the goal of making Miami “the most crypto-competitive city on the planet.”¹⁰

The Left

Populists on the Left express concern that rather than counteracting the most powerful companies, crypto – or at least types of crypto – will be co-opted by them.  For example, antitrust policy scholar Matt Stoller, then affiliated with the Open Markets Institute, said of Facebook’s Diem (Libra at the time), “Facebook absolutely can’t be trusted to manage international currency transactions and banking.”¹¹  Senator Sherrod Brown (D-OH), Chairman of the Senate Committee on Banking, Housing, and Urban Affairs, has expressed a similar concern, recently writing, “The Fed must not stop at regulating a privately issued digital currency.  It must go further and explore a publicly issued digital dollar.”¹²  He notes the “threat of private actors attempting to dominate the payment system” and concludes, “The potential for non-sovereign crypto-assets, like Bitcoin, to become more widely used as a payment mechanism poses significant monetary policy and financial stability risks.”¹³

Other Democrats on the populist Left have emphasized environmental considerations: Senator Elizabeth Warren (D-MA), for example, recently said that “with Bitcoin, and the other cryptocurrencies, I think there’s a real issue about the environmental impact,” pointing to “how much energy is consumed just to keep the currency tracking going.”¹⁴

Altcoins and Alternative Futures: Three Scenarios for Crypto

As the partisan and ideological factions coalesce into clearly delineated alliances; political attention on the sector intensifies; and new cryptocurrencies – most notably Ether, the token powering the Ethereum blockchain – challenge Bitcoin’s preeminence, investors and crypto advocates should consider several scenarios.

A Broad Anti-Crypto Coalition Emerges, Concerned About Weakening the Dollar and Enabling Illicit Finance

The result of a broad anti-crypto coalition could be the imposition of aggressive regulations and restrictions on crypto, harming the entire industry, even versions not posing a direct threat to the dollar.  For example, Ethereum could be seen as posing the same challenge to the dollar as Bitcoin.  Under this scenario, the policy consequences either would crush the category or prove most onerous for emerging players unable to bear the costs of massive regulation.  In the latter case, market leaders would be happy to enlist government intervention to facilitate a cartel defended by the moat of the administrative state.  Telegram’s experience in 2020 provides a case study: when the company ended its crypto project, Telegram Open Network, following a regulatory fight with the SEC, Facebook proved to be the biggest beneficiary, as its Messenger app was in direct competition with Telegram.¹⁵  Established, centralized giants could emerge as the greatest beneficiaries of a coalitional effort against crypto.

Growing Big Tech and Wall Street Involvement Provokes a Full-Fledged Populist Backlash

Another possibility is that both established and emerging players in crypto are caught up in the revolt against Big Tech and Wall Street.  As banking giants such as Goldman Sachs and Citigroup explore crypto, Facebook develops Diem, and Twitter CEO Jack Dorsey celebrates Bitcoin, crypto could lose its anti-establishment appeal on Left and Right.  If crypto-based companies begin to “resemble other corporate tech oligopolies,” in policy or even just in image, as the conservative American Affairs has predicted, it could become the next target of populist leaders such as Senators Josh Hawley (R-MO) and Warren.¹⁶  Former President Donald J. Trump illustrated the danger crypto faces from being associated with Big Tech and Wall Street when he called for regulations on then-Libra: “If Facebook and other companies want to become a bank, they must seek a new Banking Charter and become subject to all Banking Regulations.”¹⁷

Populists on Left and Right Embrace Crypto

Crypto could benefit from a movement inspired by opposition to Big Tech and competition with China.  This combination would harness rising anti-monopoly sentiment across the political spectrum with a similarly diverse rejection of the Chinese Communist Party. Within the right framework, crypto would serve not to undermine the U.S. position relative to China, but rather as an important element of maintaining U.S. superiority and a core engine for future economic growth.  Strand Consult Senior Vice President Roslyn Layton, for example, has written that a “deliberate lack of regulatory clarity … has ultimately favored China and other U.S. rivals while disadvantaging American companies.”¹⁸  The policy result of this approach: adoption of a crypto-friendly regulatory environment and support for U.S. companies in the sector.

Outlook

Amid continuing debates over competition with China, the proper relationship between business and state, and the influence of tech titans on society, cryptocurrency is likely to face a decisive political response in the near future.  Though currently enjoying support because of its private, decentralized nature – an attraction for Americans growing wary of corporate power – it could lose its appeal if it is co-opted by the very institutions it is challenging.  In this respect, the e-cigarette industry provides a warning: once the creative underdog, it lost its upstart bona fides when early innovators were bought out by Big Tobacco and international conglomerates.  To avoid a similar reversal of political fortune, advocates will need to show that crypto bolsters, rather than threatens, U.S. political and economic priorities.

About

Baron Public Affairs has guided clients for more than a decade through the most challenging political terrain. Applying a methodology focused on mastering the strategic competition of interests, the firm has advised some of the nation’s most prominent organizations, including members of the Fortune 10, several of America’s largest privately held businesses, and the U.S. Department of Defense.

Wescott Capital makes early-stage investments in start-ups developing blockchain, AI, and other technologies. It also advises leading institutional investors and companies on their innovation strategies.

Endnotes

1 Ray Dalio, “The Future of Everything Festival,” The Wall Street Journal, May 11, 2021, https://www.wsj.com/video/watch-ray-dalio-at-the-wsj-future-of-everything-festival/F0E3A579-EC13-4D90-BB9B-72E579349D97.html.

2 Jeff Cox, “Yellen Sounds Warning About ‘Extremely Inefficient’ Bitcoin,” CNBC, February 22, 2021, https://www.cnbc.com/2021/02/22/yellen-sounds-warning-about-extremely-inefficient-bitcoin.html.

3 Andrew Ross Sorkin, “Reading Between the Lines: A Conversation With Janet Yellen,” The New York Times, February 23, 2021, https://www.nytimes.com/2021/02/23/business/dealbook/janet-yellen-dealbook.html.

4 Theo Francis, “It’s a Close Race for CEO Support, Too,” The Wall Street Journal, October 28, 2020, https://www.wsj.com/articles/its-a-close-race-for-ceo-support-too-11603913772. For example, during his confirmation hearing, SEC Chairman Gary Gensler called blockchain technology a “catalyst for change,” saying, “If confirmed, I would look forward to fostering an environment that is supportive of financial innovation while also ensuring that investors are protected, markets are fair, orderly and efficient, and capital formation is facilitated.” See: “Nomination Hearing,” Hearing before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, 117th Congress, March 2, 2021, https://www.banking.senate.gov/hearings/02/22/2021/nomination-hearing.

5 Chris Matthews, “U.S. is ‘Behind the Curve’ on Crypto Regulations, Says SEC Commissioner Peirce,” MarketWatch, April 7, 2021, https://www.marketwatch.com/story/u-s-is-behind-the-curve-on-crypto-regulations-says-sec-commissioner-peirce-11617824160.

6 “Big Tech and China: What Do We Need from Silicon Valley?,” hosted by The Nixon Seminar on Conservative Realism and National Security, April 6, 2021, https://nixonseminar.com/2021/04/the-nixon-seminar-april-6-2021-transcript.

7 Bill Zeiser, “Either the U.S. Leads on Crypto, or China Will,” American Greatness, December 22, 2020, https://amgreatness.com/2020/12/22/either-the-us-leads-on-crypto-or-china-will.

8 “U.S.-China: Winning the Economic Competition,” Hearing before the U.S. Senate Committee on Banking, Housing, and Urban Affairs Subcommittee on Economic Policy, 116th Congress, July 22, 2020, https://www.banking.senate.gov/hearings/us-china-winning-the-economic-competition.

9 “The Digitization of Money and Payments,” Hearing before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, 116th Congress, June 30, 2020, https://www.banking.senate.gov/hearings/the-digitization-of-money-and-payments.

10 Wyoming House Bill 70, https://legiscan.com/WY/bill/HB0070/2018; Montana House Bill 584, https://legiscan.com/MT/votes/HB584/2019; Nathan McCauley, “Anchorage: A Qualified Custodian That’s Safer Than Cold Storage,” Medium, July 16, 2019, https://medium.com/anchorage/anchorage-a-qualified-custodian-thats-safer-than-cold-storage-b4646e3578e8; Oklahoma Senate Bill 1430, https://legiscan.com/OK/bill/SB1430/2020; and Will Gottsegen, “Miami Mayor Wants City to Be Crypto Capital of the World,” Decrypt, Jan 13, 2021, https://decrypt.co/54083/miami-mayor-wants-city-to-be-crypto-capital-of-the-world.

11 Press release, “Open Markets Submits Brief to Congress on Facebook Libra Currency Risks, Calls on Congress to Block Libra,” Open Markets Institute, July 15, 2019, https://www.openmarketsinstitute.org/publications/open-markets-submits-brief-congress-facebook-libra-currency-risks-calls-congress-block-libra.

12 Letter to Federal Reserve Chair Jerome H. Powell and Federal Reserve Governor Lael Brainard from Senator Sherrod Brown, March 1, 2021, https://www.banking.senate.gov/imo/media/doc/Federal%20Reserve_%20Letter%2003012021.pdf.

13 Ibid.

14 Ben Werschkul, “Elizabeth Warren: “‘There’s a Real Issue’ with Environmental Impact of Bitcoin,” Yahoo! Finance, May 7, 2021, https://finance.yahoo.com/news/elizabeth-warren-environmental-impact-bitcoin-161724029.html.

15 Pavel Durov, “What Was TON And Why It Is Over,” Telegraph, May 12, 2020, https://telegra.ph/What-Was-TON-And-Why-It-Is-Over-05-12.

16 Philippe Heilberg, “Cryptocurrencies: Commodity Dynamics and Cartelization,” American Affairs, Summer 2018, https://americanaffairsjournal.org/2018/05/cryptocurrencies-commodity-dynamics-and-cartelization/. 

17 Donald J. Trump, Twitter, July 11, 2019, https://web.archive.org/web/20190712001528if_/https://twitter.com/realDonaldTrump/status/1149472284702208000.

18 Roslyn Layton, “Cryptocurrencies and the Next SEC Chair,” China Tech Threat, December 7, 2020, https://chinatechthreat.com/wp-content/uploads/2020/12/Senate-Policy-Letter-Cryptocurrencies-and-the-Next-SEC-Chair.pdf.