The Witchhunt Comes for Crypto
Inflation makes governments rabid. This is because inflation angers the people, hitting so close to home that it calls into question the competency and legitimacy of our ruling class. And so, historically, that ruling class lashes out at anything handy, with special attention for anything outside their control. Today, that means crypto.
In the 1970’s, Nixon went after companies forced to raise prices to survive, blaming his and LBJ’s profligate spending and economy-crushing regulation on price-gouging grocery stores.
With inflation now hitting 7%, the highest since the 1970’s, the US has already hit this stage: two weeks ago I testified at House Judiciary defending food processors and grocery stores from a Congressional witchhunt blaming their trillion-dollar deficits and supply-chain crushing on greedy food producers. By the way, if you’re curious, grocery stores make a 1% margin, among the lowest in the entire economy – Citibank and Berkshire Hathaway do closer to 30%. So, yes, a witchhunt.
Alas, our government has become far more totalitarian since the 1970’s, thanks largely to the Patriot Act. And so they have a new target: your money. It’s not personal, of course: not just Bitcoin and crypto, all of fintech is in their sites. Not because they cause inflation, but because they protect from inflation, providing an escape from the elite.
The regulatory offense is now coming from all 3 branches: White House, Congress, and the Fed. All are united in wanting to kill, or enslave, any part of finance that isn’t under their control. From the White House we’re promised a Biden Executive Order by next month that uses national security -- terror financing and money laundering -- as an excuse to spin up crushing regulation. From Congress we have a new bill, the COMPETES Act, that would introduce China-style financial surveillance and control on regular people, this time because ransomware. Meanwhile, just two weeks ago the Fed issued a 40-page report pushing government-run crypto that would mean total surveillance and control of regular Americans while amplifying the Fed’s ability to mismanage the economy. The Fed’s excuse is systemic risks, which it’s ironically very good at making.
So the excuses change, but the goal is the same: with inflation at a boil, slam a lid on the pot so the frog can’t jump out.
One might note the irony, of course, since government bumbling regularly leads to national security fiascos, to encryption vulnerabilities, and to systemic crashes that bankrupt millions every decade. Indeed, were Washington serious about fighting inflation, they’d go after their own risks first: end the wars, get the state out of encryption, and close the Fed so ex-bankers can go drive trucks.
So what happens next? After all, most terrible things never come to pass, and there’s always the possibility these fail. Biden has questionable management skills, and regulators have been trying for a decade now to coordinate their attacks on crypto. The reason they’ve failed is because bureaucrats fight each other for turf, budget, and head-count – power is the currency in their world, and they compete as fiercely as any company for it. So even if all those bureaucrats agree to ban crypto, or to tame it in a way that kills it in the process, they may well hate each other more than they hate crypto.
Meanwhile, our Congress is currently gloriously stuck, so long as spineless GOP and centrist Dems doesn’t once again sell out their voters at the behest of big business and CNN. And, finally, money talks, and there are enough banks and financial institutions who want to keep crypto alive — more on that anon.
Still, just for fun, let’s imagine these regulations and bills do happen. The result would be institutions saddled with enormous compliance burdens that, effectively, could chase them out of crypto, while crypto-based applications like Ethereum and even end-users are decimated by compliance burdens that render them too difficult and too expensive to use.
It would certainly be catastrophic for altcoins and fintech services, but it could paradoxically benefit Bitcoin. Recently I wrote about a total Bitcoin ban, concluding that it would short-term sink the price, but long-term concentrate Bitcoin into the most radical hands – Ancap billionaires.
What’s on the table now isn’t a ban, but it’s a potentially crippling series of burdens and compliance costs that, in aggregate, could end up sorting the crypto and fintech industry by obedience. With the most obedient – Citibank, say – being regulated to death, while the least regulated picks up the slack. Leaving the demand for a state-independent currency in the hands of, ultimately, self-hosted Bitcoin.
This is because regulation isn’t simply a matter of banning the industry, or of shrinking it proportionately – making it half as big, or 1/10 as big. Rather, regulations impact by obedience: they chase out the obedient domestic institutions first, then the arms-length foreign institutions, then the alt-coins and institution-linked Bitcoin (eg exchanges). And they never touch the crazies who could care less what regulations ooze from Washington, because the surf’s up in Puerto Rico or Salvador.
This has two interesting consequences. First, all that money demand isn’t going back into dollars or Amazon gift cards. Indeed, as regulatory burdens ratchet up, the money demand progressively has nowhere to go but, at the end of a long sequence, self-hosted Bitcoin that alone has the decentralization and social layer to survive.
Second, notice the political path of collateral damage: it starts with the most influential (domestic banks), then on to less and less influential (foreign institutions, altcoins, exchanges), ending with random families who have some Bitcoin. And yet it never even touches the retired Bitcoin millionaires on Salvadoran beaches.
This is not the ideal structure for destroying an industry: the most powerful are the first victims, families the second, but unsympathetic beach-bum millionaires don’t care. This pattern alone suggests there will be pushback from those first victims on Wall Street, stewing as they watch foreign banks and barefoot Bitcoiners eat their lunch. That alone could dead-letter the regulations before they even get going. And it means a constant behind-scenes erosion of regulations, as Wall Street bribes and cajoles its seat at the table.
So, if I had to guess, we will get new regulation – the inflation scapegoat demands a sacrifice. But I think any regulation that bites will end up splitting crypto into a neutered compliant industry, and an untamable Bitcoin. With the neutered side working ceaselessly to bribe and erode away the regulatory bite. While the untamed side -- as it has for decades now -- continues blissfully on as the monetary backup for the monetary eschaton. Bitcoin takes a price hit, sure, but its fundamental value proposition as backup money marches on, stronger than ever, even as the regulation-obedient altcoins fall away like flakes of iron in a crucible.
And so, as with a full Bitcoin ban, I certainly don’t want governments to destroy when they were perfectly capable of sitting down and shutting up. Still, if they do try to destroy private money, they’ll take out the town without ever hitting the castle.
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