The U.S. federal government is poised to plan to ask for money form a group to admire the problem of regulating cryptocurrency.
That’s essentially what the news is about this morning. Major news agencies splashed “regulation” and “cryptocurrency” over the headlines but if you read the articles, what they say is essentially as follows:
- Crypto has problems. No kidding: ransomware, money laundering, funding all manner of crime, tax evasion, etc. Of course, many of these same problems exist with fiat currency and cash itself. Some of these issues quite literally go back to the Bronze Age when the first monetary technology (coins) was introduced.
- The President is going to issue an executive order to direct various agencies to “study the legal and economic ramifications of creating a U.S. central bank digital currency”.
Which means…what? Essentially an order like that instructs the relevant departments (presumably Treasury and Justice) to get together and talk. The news says the President has requested (in an “this is an order” sense) a report due in 180 days.
That’s a looooooong way from new legislation that affects you. Here’s what that process would look like:
- For six months, policy wonks hold meetings and talk. If you’ve ever tried to conduct meetings with a large number of people in multiple organizations, you know how well this works.
- Eventually, the report is delivered. It should actually be interesting to read. Many Federal government reports are surprisingly well-written (e.g., the Warren Committee Report on the JFK assassination, the 9/11 report, etc.)
- This is followed by a few weeks of screaming and shouting by pundits, congressmen, etc. Legislation could be introduced to official recognize that the sky is blue and political people would argue .
- Someone drafts legislation.
- A dozen lobbying firms jump in and argue about it and rewrite it.
- The bill the enters the famously complex legislative process (which takes a 29-step flowchart with three different colors to explain, or you can view the cartoon version).
What Could Happen?
Many people have commented that cryptocurrency regulation is impossible. But it’s not, at least in the short term, because cryptocurrency has an achilles’ heel.
Let’s set aside billionaires in this discussion. People will that level of money will find ways to hide money and they can afford to hire very smart people to maneuver their money for them, and average people’s can’t. Also, if I’m a billionaire, putting a few million into crypto is not really risking money, so it’s a completely different universe.
Americans are already required to declare crypto profits on taxes. If you buy $1000 of BitCoin and sell it for $1500, you have to pay takes on the $500 profit, just as if you’d made a profit trading Yen or Euros or fine art for that matter. Do Americans pay taxes on their crypto? Well, in 2018, only .04% of Americans paid taxes on crypto. So when these initial tax regulations emerged, a lot of pundits said people would efficiently evade taxes on crypto.
However, at the moment crypto still has an achilles’ heel: you can’t use it as your only currency.
If you could put all your wealth into crypto, pay all your living expenses, prepare for your retirement, and buy major assets, then I think you could make a case for being a ghost in the system. But you can’t.
First, the vast majority of us are paid by employers in our local currency. Or if you own a business, your customers overwhelmingly pay in fiat currency. So your main wealth is coming to you via fiat currency.
Second, you can certainly pay for many things with crypto. But you can’t buy a house, a car, etc. at least not without entering public records which defeats any secrecy. I’m sure you could construct a transaction where you obtain real estate or a car with crypto, but those items you have to register. Also, other individuals derive income (car salesmen, real estate agents, etc.) so your transaction is anything but secret. The government is well aware that yesterday you didn’t own a Bugatti roadster and today you do and can ask how you paid for it.
Also, how are you going to save for retirement? It’s impossible to open any kind of bank account in the US (and many other countries) without jumping through a series of “Know Your Customer” and anti-money-laundering hoops. So even if Ameritrade starts accepting BitCoin tomorrow, they’re going to provide the IRS, etc. with information that says “John Smith, SSN 123-45-6789, deposited $10,000 in BTC”.
One article I found phrases it quite succinctly:
“The number one way that the government could regulate cryptocurrencies is by taxing any fiat money you use to cash out a virtual token. The main caveat with this is that this would have to apply to specific tokens and a cryptocurrency owner could simply turn to another coin to cash out. Beyond this, many early adopters and hardliners prefer cryptocurrencies as medium of exchange for basic goods and services over traditional fiat currencies. “
So the problem is one of fighting individuals who are engaged in crime – ransomware, drug trafficking, etc. The government’s strategy is obviously to limit the access points where fiat currency can move in/out of crypto. The more things you can buy with BTC, the more attractive it is. If there are limits on what you can spend it on, BTC is by nature limited.
Of course, there is the observation that crypto is not just about secrecy, or even that it provides secrecy, and that it’s really about global economic transformation and unhooking money from governments. Those are larger conversations about economics which are simply an implementation choice, and regardless, governments are not going to give up their power. As long as they can regulate how you can spend significant sums of money (houses, cars, retirement, etc.), fiat currency isn’t going away.