Alongside the public’s newly found fascination with cryptocurrencies (which only sometimes includes their attempts to try and understand what they are — a process for the teacher akin to trying to explain to an AARP member how to program a VCR back in the day), there is serious debate and discussion among scholars and policymakers about how to look at them and treat them for public policy purposes.
From a public policy perspective, the question centers essentially on assigning “crypto” to one of four different categories. Are they
All are being considered, and each approach has its adherents and detractors.
The most logical route would be to view cryptocurrency as an entirely new thing (which it is). It doesn’t easily fit into any of the preexisting categories — it’s somewhere, honestly, between a commodity and a currency. Many cryptocurrencies do require intense resource utilization, but they can immediately be used as a standard of exchange.
But politics and public policy rarely follow the path of logic. Expedience is usually the solution to the question of the day — so policymakers will most likely try (and are trying) to fit crypto into one of those preexisting categories.
Of course, policymakers could leave crypto alone entirely. After all, that’s part of what cryptocurrencies are there for: to be used as an investment or transaction medium just out of reach of government hands or eyes. But that’s highly unlikely given the enormous value of the crypto marketplace — over $1 trillion by some estimates. Policymakers, especially those on the revenue-hungry and tax-producing left, want their cut, and that will require some decision-making — and leadership on someone’s part.
In the United States, that leadership should come from Congress, well before any action on the part of executive branch agencies, especially since nobody has decided just what a cryptocurrency is. But sometimes the president doesn’t want to wait for Congress, and sometimes agency heads don’t want to wait for the White House, to make those kinds of decisions.
Part of the problem, of course, is that the vagueness of existing statutory regimes gives agencies enormous power, and deference in deciding how that power is used. Under the concept of “Chevron Deference,” an agency has enormous leeway in how it interprets the statutes undergirding its powers. Under the concept of “Auer Deference,” that same agency has enormous leeway in how it interprets the regulations it has properly promulgated.
This leads us to a real problem within the public policy arena when it comes to cryptocurrency. In the last days of the previous administration, and on the very last day of his tenure as head of the Securities and Exchange Commission, SEC Chair Jay Clayton oversaw the filing of a lawsuit against Ripple, the creator of the cryptocurrency XRP.
Despite having said in 2018 that Bitcoin (probably the best-known cryptocurrency) was not a “security” (as that term is defined for the scope of the SEC’s authority), Clayton decided that this late-in-the-day suit against Ripple was warranted. Similarly curious, the SEC’s Corporation Finance Division Chief William Hinman also said in a widely covered 2018 speech that cryptocurrencies like Ether were also not securities under the regulatory auspices of the SEC.
While it is unclear what changed between these public statements and the SEC’s decision to put the full weight of federal law enforcement actions in a lawsuit against Ripple, what is clear is that the lawsuit has had a profound impact on that company, which is now facing scrutiny for more than seven years of trading in that cryptocurrency. But it had an even worse impact on millions of retail holders of XRP, who have traded it as a currency, not a security, for the same length of time. The investors, which the SEC is supposed to be protecting, faced the loss of current trading on platforms like Coinbase, which suspended such trades in the wake of the SEC’s suit.
This is especially important given what both Clayton and Hinman were doing before they came to the highest levels of the SEC and what they’ve been doing since they left public service. Clayton works for One River Digital Asset Management, an investment hedge fund focused exclusively on the two cryptocurrencies he helped at the SEC — Bitcoin and Ether. Hinman has gone back to the venerated, white-shoe law firm of Simpson Thacher & Bartlett. Simpson Thacher is part of the Enterprise Ethereum Alliance, an entity that looks at the uses of Ethereum’s blockchain technologies beyond just the cryptocurrency side. (Blockchain, the distributing ledgering system underlying cryptocurrencies, sometimes is used to create cryptocurrencies in and of themselves, and sometimes they use cryptocurrencies to create tokens that incentivize the distributed security responsibilities of a blockchain-based ledger.)
But it’s Clayton and Hinman’s work with China that should be especially concerning. It is the “prime directive” of the Chinese Communist Party to replace the United States as the dominant global power, both in terms of raw strength and, especially, economic power. This has come in the form of undercutting U.S. manufacturing costs, ignoring global environmental regimes, investing heavily in infrastructure in developing economies, and, unsurprisingly, developing cryptocurrency. China has released its own version of a digital currency, with the clear goal of making the yuan — both in its hard and digital forms, the preeminent global currency.
Clayton and Hinman have both done high-level work for Chinese firms. Both, for instance, were signatories to the filings with the SEC in the IPO for marketplace giant Alibaba. And in addition to China’s creation of a digital yuan, the nation has become a major player in the crypto marketplace, having focused on massively scaling up the nation’s ability to “mine” Bitcoin. Some theorize that China effectively controls the Bitcoin marketplace, with some two-thirds of the total global mining capacity.
Beyond being threatened by large-scale Bitcoin mining elsewhere, the one thing that would concern the Chinese government is competition from other cryptocurrencies — currencies like XRP. By taking government action and effectively tying up the trading of XRP, those who control the mining of Bitcoin and Ether could benefit enormously.
Importantly, the chain of agency decision-making, and the inconsistencies between the lawsuit and the public statements of Clayton and Hinman regarding the federal treatment of crypto, isn’t lost on the judge assigned to the SEC’s lawsuit. Magistrate Judge Sarah Netburn, who sits in the federal bench’s Southern District of New York, said that the statements these officials made about Bitcoin and Ether are highly relevant in the lawsuit against Ripple and XRP, and she gave Ripple the green light to access internal documents that shed light on how those impactful public comments came about.
Regardless of the outcome of the Ripple case, it is clear that the SEC, Clayton, and Hinman should not have hijacked the policy process by taking advantage of a vacuum of clear boundaries on how far agencies can stick their noses into these issues. This is especially true given the competitive economic interests in question. While the U.S. is hamstringing the world’s best cryptocurrency creators with legal and regulatory proceedings, China is rocketing ahead with a digital currency of its own by ripping off the innovations of others and is working to effectively control cryptocurrency marketplaces by mining blockchains that started in the free world.
While past experience certainly indicates that Congress will not likely act in a beneficial way, the time has come for them to take a smart look at crypto and make a logical decision about how to treat it for policy purposes. They can start by putting clear limits on the regulators. It’s not that crypto is the next global economic battlefield — it’s the current one.
Andrew Langer is President of the Institute for Liberty and has worked on cryptocurrency and blockchain policy issues for several years.
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