What a bitcoin ban could look like, and how the worst case scenario might be avoided in favor of finding common ground between crypto-enthusiasts and lawmakers as digital asset policy takes center stage.
Introduction: Beating Them vs. Joining Them
There was an early moment in bitcoin history when its mysterious creator, Satoshi Nakamoto, urged caution just as the community was eager to help support Wikileaks via donations, citing that at that time (this was early 2010), the need for the project to grow stronger and avoid the risk of destruction relied on staying under the radar. This summer, we’ve seen an unprecedented level of interest from all facets of the United States government as the one-two punch of the Trump tweet and the Mnuchin press conference put all of the digital asset world on notice, at least by the Executive branch. At the same time, we’ve now seen both chambers of Congress question David Marcus about Facebook’s Libra plans, and the Senate itself follow up by holding a hearing and inviting panelists to continue educating the Banking Committee members about blockchain and Bitcoin. While the Supreme Court has not yet had a chance to weigh in with any meaningful jurisprudence yet, I’m 100% confident that the many pending cases in civil and criminal courts include candidates that will eventually serve as the basis of the cryptocurrency case law cited by digital asset lawyers in the future.
Suffice it to say that Satoshi’s wish of staying under the radar is now fully off the table, in a way that was not quite the case even immediately following the closure of Silk Road, as we’ve now moved on from enforcement action to hearing Congressional openly asking industry participants how future laws governing the space should be made. As much as American cypherpunks may bristle against working together with the government to find the best way forward, it’s worth reminding them of the common saying that “if you’re not at the table, you’re on the menu”.
Who Are the Stakeholders in DC, and What Do They Want?
A common misconception about Washington DC is that political views toward a subject are monolithic or at least hew along pre-established party lines. This could not be further from the truth. In my former life as an analyst whose coverage universe included the heavily regulated telecom and cable industries, I would often take the quick flight into Reagan (or the Acela down to Union Station) a couple of times a year for meetings with FCC commissioners, regulatory lawyers that were hosted by sell-side analysts specializing in policy (many of whom were former lawyers or lobbyists as well). One of the bigger takeaways from all of these meetings was both extremely simple but foreign to myself as someone who didn’t have any experience as a staffer on The Hill — namely the idea of political capital as a finite resource that can be earned, spent, leveraged, and squandered. Importantly, this framework needs to be applied to the concept of cryptocurrencies / and digital assets, but from the perspective of setting up ways for lawmakers to view this emergent technology as an asset and not a threat.
Let’s start with the Executive branch, where the story is probably the simplest given the power dynamics of the presidency dictating action. No matter your political leaning, I believe it’s uncontroversial to note that President Trump holds antiquated views of what drives American excellence, which may have been true in the past (hence his romanticizing of Pennsylvania coal miners and US heavy manufacturing, industries which have shrunk dramatically in the last few decades). Similarly, I believe the Bitcoin / Libra tweets of July 11th can be understood in this context, which is simply an initial defensive reaction against a technology that is unfamiliar, and thus threatening, unsurprising for a guy who reportedly continues to dislike computers and email systems. It’s no wonder that he likely views bitcoin and other cryptocurrencies with suspicion, but my point is I think the problem is one of education, as Trump likely just needs to be convinced of two things, that there’s 1) enough ability to track and prevent illicit misuse of bitcoin and other cryptocurrencies in support of national security concerns, and 2) cryptocurrencies are a way to promote the freedom of markets and minds in a way that has never existed before, right in-line with our foreign policy goals. It’s unclear who exactly might be in the best position to start bending his ear to the points above, but if / when this happens (recent quotes have seen previous White House employees Steve Bannon and Scaramucci talking about bitcoin), I think Trump will be more receptive in the future than currently assumed, especially given the currently negative status quo sentiment.
The Legislative Lay of the Land
Moving over to our bicameral Legislature, the sentiment toward cryptocurrencies is more varied, especially after the market received a lot of additional information over the last month as a result of the combined data dump from all of the back and forth from the 2 Libra hearings and the more recent Senate follow-up panel. I think there are roughly three groups of people that I’ll call the Allies, the Curious, and the Hopeless with respect to their current position with respect to cryptocurrencies, though there’s also a group of people I’ll call the Facebook Haters whose initial positions are more anti-Libra on the basis of recent parent company privacy violations as opposed to having a formal position on digital assets, though are most likely a subset of the Curious. We’ll go through some examples of the below, their motivation, and what actions they might take in the future.
“The world that Satoshi Nakamoto, author of the Bitcoin whitepaper, envisioned and others are building is an unstoppable force.” — Patrick McHenry, Republican Leader of the House Financial Services Committee
“This is obviously a very critical issue. I want the U.S. to stay at the forefront … of this new creative technology. I do believe that it has some incredible potential that can be utilized for good and has some incredible risk that can be utilized for bad. and we just need to get a handle on that. “ — Mike Crapo, Republican Chair of the Senate Committee on Banking, Housing, and Urban Affairs
Before the recent round of hearings, I had assumed incorrectly that there were few members of Congress who had read the bitcoin whitepaper, or really understood the differences between cryptocurrencies and centralized / permissioned implementations of blockchain technology like Libra. I was pleasantly surprised that there seems to be a “fifth column” of lawmakers who appear both knowledgeable and supportive of the innovation of cryptocurrencies, and are signaling their willingness to more actively support legislation that helps expand the promise of digital assets while mitigating some of their risks. One focal point to continue to monitor is the 2019 Token Taxonomy Act that has been reintroduced into the current session of Congress, especially within the context of the Democratic primary that’s heating up.
“It strikes me as wildly premature for us to come to the conclusion that we have to act now to prevent what could be a very constructive innovation in financial services. I think there are tremendous potential benefits in blockchain technologies and cryptocurrencies … so I just think we should be exploring this, and considering the benefits as well as the risks.” — Pat Toomey (R-PA), Chairman of the Financial Institutions and Consumer Protection Senate Subcommittee
“I want to echo the comments that this hearing seems premature. So far, private companies are beginning to form an association… I understand the interest in this idea but our time would be better spent on issues that will benefit the American people immediately. We should not discourage the private sector investing their own time and money to research new tech. No matter what polices we enact, the private sector is the engine that creates solutions to some of the great problems. “ — Roger Williams (R-TX 25th District), member of the House Committee on Financial Services
Most of the senators and representatives belong in this bucket for the time being, and I view this as the most important opportunity set for industry players and non-profits organizations like CoinCenter to continue the multi-year education effort. As trite as the comparison to the early days of the internet is for those that continue to hear the references at every cryptocurrency event, we should keep in mind that for many of the lawmakers, those arguments are both convincing, and also fresh. Even acknowledging some of the problems of the surveillance capitalism that has developed (problems that some of the decentralized blockchain protocols can help address via self-sovereign identity, privacy enhancements etc.), Washington is undoubtedly happy that American internet companies have led the world into the information age over the last two decades — it’s a clear and easy pitch to tap into the desire for lawmakers to have American companies do the same again for the nascent world of digital assets. This is even more vital given the greatly reduced friction present in crypto, since American start-ups still have the option of relocating operations elsewhere if DC moves too slow to accommodate the industry, as happened with Circle recently, which CEO Jeremy Allaire testified to at the second Senate hearing.
“But someone with an understanding of the politics of this country needs to explain to Mr. Zuckerberg that if cryptocurrency is used to finance the next horrific terrorist attack against Americans, a hundred lawyers standing in a row, charging $2,000 an hour are not going to protect his rear end from the wrath of the American people.” — Brad Sherman (D-CA 30th District), Member of the House Committee on Financial Services
Following up from his May 2019 comments calling for a ban on cryptocurrencies, Brad Sherman took his opportunities during the House hearing on Libra to continue his fire and brimstone characterization of the cryptocurrency world. While it might be easy to dismiss his points as fearmongering baseless, Sherman has been a consistent and vocal opponent of anything short of an outright ban (a risk which we will explore in more detail shortly), so it would be dangerous to ignore this his commentary. As with most things — it’s about following the money, and Sherman’s campaign donations by industry are heavily skewed towards existing financial incumbents, including insurance, real estate / finance, and commercial banking interests. Although I’m optimistic we’ll see less of a kneejerk response like this going forward, we must remain vigilant in identifying conflicts of interest, and correcting false statements when they’re made — in Sherman’s case, refuting his repeated comments that cryptocurrencies are predominantly used for tax evasion, money laundering, and terrorism funding. There have been many studies both by the government and nonprofits on this point, and even as recently as July 2019 an MIT AI Lab study estimated only 2% of bitcoin transactions were deemed illicit, while many news sources have covered the continued acceleration of printing of $100 bills well in excess of the growth in supply of lower denominations, suggesting continue growth in criminal use of the paper dollar bill.
The Facebook Haters:
“Facebook has proven over and over, through scandal after scandal, that it can’t be trusted. They move fast and break things — things like our political discourse, journalism, relationships, privacy. Now they want to break our currency and payment systems, hiding behind the phrase ‘innovation.’ Before they blew up the economy in 2008, bankers were pitching an ‘innovative’ new product called subprime mortgages.” — Sherrod Brown, Democratic Ranking Member of the Senate Committee on Banking, Housing, and Urban Affairs
“Mr. Marcus, thank you for your appearance and your testimony. Your CEO in testimony before Congress referred to Silicon Valley as, ‘an extremely left-wing place.’ That’s why so many center-right voices have concerns about censorship on platforms like Facebook but also Twitter, Google and so forth. I worry about the possibility that a digital wallet and digital currency like Libra could extend that into the payment system.” — Tom Cotton, Republican Member of the Senate Committee on Banking, Housing, and Urban Affairs
This group is easy to understand, and I view as generally as a subset of the Curious broader pool, but are comprised of those who feel particularly acute animosity to Facebook’s missteps around GDPR and privacy in general, as a result of the Cambridge Analytica scandal coming to light. The key for the crypto community here is to continue the narrative to encourage comparison and contrasting between what Facebook is building with Libra, and the truly open and permissionless networks like Bitcoin, Ethereum etc. Specifically, I think underlining the ability for the open networks to enable value transfer without risking privacy will be an important conversation point which could help with the conversion of the Haters into Allies.
Where Does Crypto Fall on the Traditional Political Spectrum?
What is unique, and frankly, awesome in my eyes — is the fact that a politician’s formal party affiliation is not as strong an indicator for the individual’s views on digital assets and cryptocurrencies. For example, going back to the Token Taxonomy Act as introduced in the current session of congress, the Co-sponsors are bipartisan, with roughly equal numbers of GOP and Democratic congresspeople listed. While the “Allies” bucket that I’ve outlined above is much smaller than the Curious and bucket, I believe the lack of a “party-line” for either party is generally setting up the incentive structure in much the same way as crypto tends to do for any substrate — namely allowing for the free market competition of ideas in a verifiable and open manner. We’re now living in a world where there’s a Super PAC supporting Andrew Yang’s presidential candidacy that accepts Lightning payments on the Bitcoin network, a Congressional Blockchain Caucus, not to mention early leadership from Wyoming and other state governments who are looking into the future when competing to attract blockchain jobs with the right legal frameworks could dramatically expand the population and tax base of their population centers over the next few decades.
Zooming out a bit and approaching the question of ideology, the multidisciplinary aspect of cryptocurrencies (which blends economics, computer science, math, politics and other fields) also applies when trying to fit into the traditional platforms of the left and right. The financial inclusion and greater transparency enabled by blockchain technologies are positive points supportive of the traditional Democratic views, while the free market competition and potential to improve revenues and costs at scale for businesses speaks well to what Republicans have always valued. Thus, the truth of the matter is there is something for everyone, which is one of the many reasons why I think lawmakers will ultimately and collectively come around in time to be on the right side of history and help drive the regulatory clarity which will ultimately help keep jobs and tax revenues within the United States.
Sizing Up A Disaster Scenario: What Could Lead to an Outright Ban, and How to Mitigate This Risk?
Even though Bitcoin at this point is over ten years old, and the cat is effectively out of the bag, there’s still a possible, albeit unlikely, path where the US government could be forced to de facto ban bitcoin and other permissionless cryptocurrencies. While technically this is impossible due to the peer-to-peer nature of the permissionless open network (anyone can run a full node), the government could issue extremely onerous regulations including but not limited to the following:
- Criminalizing the sale of US Dollars for any cryptocurrency under the guise of national security — thereby invalidating all of the centralized exchange businesses in the United States, including the bulk of revenues generated by Coinbase, Gemini, and others
- Imposing onerous KYC / AML requirements and liabilities at the individual level, such as making it illegal for a US person to possess or transfer a bitcoin UTXO which has a prior history of being “tainted” by an address associated with sanctioned persons
- Introducing high import tariffs for ASICs and other mining-related hardware, possibly as part of the trade-war-related rhetoric capitalizing on anti-China sentiment
- Directly challenging the network security model by amassing enough hashpower to 51% attack and conduct deep-reorganization of existing POW chains (that don’t have checkpointing systems implemented), to shake consumer confidence, tank price, and make subsequent 51% attacks even easier.
To be clear, the above 4 vectors of attack represent sets of absolute worst-case scenarios, which would open up the federal government up to legal challenges of all kinds, not to mention requiring a substantial priority being directed and coordinated at a multi-agency level at a time when many crypto-adjacent agencies such as the SEC and IRS have openly admitted staffing constraints already being a factor. More specifically, here are some reasons why I think the risks above are mitigated partially, though never completely:
- A government ban on the exchange operators is definitely possible, and it’s exactly what the Chinese government did (along with banning ICOs) in 4th quarter 2017, citing consumer protection concerns. However, the United States’ checks and balances offer a lot more room for legal challenges to government policy, which would be a logical step if the US were to actually pursue a similar course of action. We’re already seeing iFinex, the parent company of Bitfinex and a related party to the Tether stablecoin, slug it out with the NYAG, suggesting that the rest of the US-based exchanges (with arguably even larger war chests from organic business revenues and heavy duty VC backers, with Coinbase closing a $300M Series E in 4Q18) are likely even more able to mount strong legal defenses in response to any unilateral decisions by the government to shut down their business.
- Earlier this year, The Treasury Department’s OFAC added 2 bitcoin addresses to the list of prohibited destinations to which US citizens are not allowed to send value. One could imagine a scenario where enforcement actions at an individual level are used to make examples out of offenders, similar to how the early 2000s saw aggressive prosecutions of younger violators of the DMCA who had used torrents or other P2P filesharing services to illegally download Mp3’s. In the case of making examples out of crypto users, we might see zealous prosecution of a US person where an upstream or downstream bitcoin address was ultimately tied to a sanctioned person or activity. However, it remains to be seen how many “degrees” of separation are enough to reduce or eliminate liability — the truth is there’s yet to be any case law established on this front, but I think it becomes difficult to seriously consider a government victory to be possible on appeal given how there’s no corresponding onus for a US person to verify prior and subsequent users of a federal reserve note (the dollar bill). The thought experiment veers pretty quickly into the realm of the absurd.
- The tariff risk is in some ways more real as a possibility given the Trump administration is already actively engaging in brinksmanship on hundreds of billions of other industries of imported goods and component parts, so it would theoretically be easier to restrict importation of the various ASICs and other hardware which are by and large manufactured in China. However, such an action would both be a 1) weirdly specific focus and only constrain the ability for hashpower to grow (it’s difficult to identify and confiscate existing mining operations), while also 2) actually mitigating risk #4 (the US secretly amassing hash rate to 51% attack bitcoin, since there simply isn’t enough US-based manufacturing capacity in terms of semiconductor and related capital equipment / supply chains, since anyone who has covered that industry knows about the long lead times, heavy capex, and Asian relationships (Taiwan and Hong-Kong / Shenzhen especially) necessary to correctly manufacture the chipsets, circuit boards, and other components required.
- The last attack vector we’ll look at is both the most severe (in terms of downside risk to Bitcoin and other public blockchains), although I feel the least likely in terms of actual possibility. A lot of the cypherpunks who were part of the early crypto community continue to fear CIA / FBI infiltration of developer communities, secret mining hash being collected to eventually overthrow bitcoin all at once, and some even believe that Satoshi could have been captured and is now held by government forces. A couple of points to address are:
- The actual damage that’s possible in a 51% attack tends to be overstated in the mainstream media — while some double-spends could be possible, generally one’s funds remain safe, and it can be expected that nodes related to the government can be identified, and ultimately the Bitcoin (or other network) can be rolled back, and forked to restore the state of the network prior to an overt attack. Something like this would certainly a big negative for the price of bitcoin and represent a total war / salting the earth strategy from a sentiment perspective, pushing back adoption by 5–10 years at the least, though it would require the US to have accumulated a serious amount of ASICs, when we can see from their own filings that they’re still trying to figure out who they can outsource the running of full node implementations to for purposes of conducting blockchain based analytics
- The error people make in thinking developer communities have been infiltrated by government agents is in overestimating the actual threat level of open permissionless chains from a national security perspective — with the middle east still a mess and greater friction mounting between the US, China, and Russia, my view is the CIA and other 3-letter agencies have much bigger fish to fry in terms of utilizing operational assets in a way to safeguard security without sneaking into Slack / Discord channels of crypto devs. To be clear, I think there are definitely human / governance problems in most if not all digital asset projects, but they’re of our own make, and a natural result of individual conflicts and disagreements.
- If Satoshi has actually been captured, Trump would have been briefed to a serious extent, and the content / tone of his tweets on Libra and Mnuchin’s press conference on cryptocurrencies would have been fairly different, in my opinion. This is probably the same reason I don’t think we have real proof of aliens yet either, since the President would have likely been unable to keep the secret from Twitter, or the still-leaky White House sources would have been able to pass along such information to the DC media.
Detour: Debating Dollar Strength vs. Weakness
It’s now time to talk about how the future of the Dollar, as desired by the government, fits into the cryptocurrency discussion. As a level-setting point, I continue to believe the elevated notional debt of the US, rising global instability, negative interest rate risk (cuts and potentially QE coming back in full force) will pressure fiat currencies including the dollar and serve as a multi-year positive catalyst for digital assets, particularly the decentralized cryptocurrency networks like Bitcoin. Nevertheless, the rhetoric coming out of Washington should matter with respect to what they (mostly the Executive branch given the power of the Treasury and the questionable independence of Jerome Powell) want for the Dollar. However, per an August 1st summary article on Bloomberg, Trump has been characteristically inconsistent in his view on what he wants, saying that a strong Dollar is beautiful but also making it harder for the US to compete globally (as a quick refresh, a weaker dollar makes it easier for US manufacturers to export their goods to international markets, all else being equal).
Thus the US’s desires are actually going to be less important than the continued backdrop of a global backslide into increasingly negative interest rate territory, first driven by the Eurozone, which will act as pressure pushing the rest of Asia and the western hemisphere to follow suit in the race to the bottom. Trump’s tariff rhetoric has already made it clear he’s willing to sacrifice the American businesses that are hurt by higher import costs (which would be further magnified by a weaker dollar), at a time where even Apple is quoted in the press as being vulnerable to the supply chain disruption in the context of its annual iPhone refresh.
Conclusion: Adoption, as Always, Remains Key
It will be important for the global digital assets community to continue to make it easier for the early thought leaders (the Allies) within Congress to make the case to their fellow lawmakers (the Curious especially), in order to drive higher the probability of a lighter-touch regulatory framework similar to the Title 1 designation of communication services built on the internet under the 1996 Telecommunications Act. The best way to do this is to focus on driving consumer awareness, adoption, and education and bend the climb up the S-curve of technological adoption as quickly as possible. To be clear, I view this as a shared mission for all of the public permissionless chains, the corporate-backed projects (like Libra), and even the eventual central bank digital currencies. It is only by making the world of digital assets more familiar, understandable, and integrated into the lives of as many voting Americans as possible, that we’ll ease DC’s concerns and underscore the positive power the technology can ultimately have for our society.
At the end of the day, the best measure of success is not at any given dollar-denominated price of bitcoin, but rather when we’ve successfully delivered on the promises of financial inclusion, transparency, and self-sovereign value storage in such a way that crypto, finally, becomes boring to talk about.