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What President Biden’s crypto policy might really be about
The Administration’s anti-cryptocurrency policies risk alienating voters of both parties. But the bigger picture, while potentially misleading, may be about preserving America’s global economic power.
Published May 14, 2024 at 12:52 pm EST.
David Z. Morris is a longtime technology and finance reporter and the creator of Dark marketsa newsletter about cryptocurrency, true financial crime and systemic corruption.
Cryptocurrency is becoming a major issue in a US presidential campaign for the first time, as Donald Trump and Joe Biden face off ahead of November’s general election. But what seems like a domestic political misstep by Democrats may actually be about preserving America’s global banking hegemony.
The stakes are rapidly rising. Trump did pro-crypto comments at Mar-A-Lago last week, he appeared to reverse his previous stance on bitcoin “a scam against the dollar”. A recent Harris Poll sponsored by Digital Currency Group found this 20% of American voters consider cryptocurrencies a key issue. Just this morning, Bitcoin Magazine reported comments from longtime Democratic financier Marc Cuban, who said the Biden administration’s anti-crypto stance could it cost Biden the election against Trump.
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The immediate cause of the surge in cryptopolitics is the Biden administration’s stated intention to veto the revocation of the SEC’s Staff Accounting Bulletin 121 (SAB 121). Accounting guidelines require banks to treat digital assets held on behalf of clients as if they were assets owned by the banks, which in turn requires them to hold 5% of the amount in added reserve capital, despite them not being able to use the assets, since they belong to the customers. (Big thanks to Castle Island Ventures Matt Walshwhich sounded the SAB 121 alarm in advance.)
This makes cryptocurrency custody economically unviable for financial institutions and amounts to a cryptocurrency custody ban, imposed without any legal or administrative process. SAB 121 is “guidance” rather than a formal regulatory “rule” and therefore has not been subjected to the standard public comment and review process for new agency regulations.
As Congressman Tom Emmer (right) argued, the rule accomplishes the opposite of the goal legislated by the SEC as an agency, making the market for digital assets more focused, less fair and less certain. The effects of the rule include shifting cryptocurrency custodian services to less established and riskier operators, including offshore ones – the type of custodians that could easily prove to be the next FTX.
“Chokepoint 2.0” and democratic censorship
It doesn’t take much imagination to figure out that making cryptocurrencies less secure is actually the goal of Gensler’s guidance, which forms another pillar in the Biden administration’s ongoing effort, dubbed “Choke Point 2.0” by critics, to prevent any integration of cryptocurrencies with the US financial system, without clear legal authority to pursue such an agenda. That effort included Gensler’s now-failed attempt to block a bitcoin ETF, as well as a series of troubled enforcement actions, including those targeting trusted trading venues like Coinbase.
The nickname “Chokepoint 2.0” is key to the partisan politics at play here. The original Operation Chokepoint was an effort by the Obama administration to pressure banks not to deal with industries including weapons manufacturers and money lenders, essentially threatening greater scrutiny of banks that dealt with those industries.
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Even if one respects the goal of the effort to reduce socially undesirable industries, this was a seriously flawed idea. Operation Chokepoint was described as an abuse of the agency’s power by the House Oversight Committee and stopped by the FDIC in 2015. The FDIC settled numerous lawsuits following the program and new restrictions were imposed on its powers .
Notably, the original Obama-era Chokepoint was essentially engineered by Martin Greunbergwho, as the current head of the FDIC, also plays an important role in Chokepoint 2.0.
The global politics of armed finance
The use of banking leverage to attack undesirable but legal industries reflects two distinct factors in U.S. politics. Democrats seem more willing than Republicans to use banks as a cudgel against domestic undesirables, and cryptocurrencies in particular. But in recent years, the United States as a whole has dramatically stepped up its use of the financial system as a weapon against global adversaries, including under the Trump administration. At both levels, these policies aim for short-term tactical gains, with the risk of uncertain and possibly damaging long-term strategic losses.
Not surprisingly, the SEC and Biden administration’s abuse of financial regulation to target legal American businesses has mostly drawn criticism from the conservative right. These can be described as generally “pro-freedom” voters who don’t like the idea of being told what to do, especially by unelected regulators.
But like Nic Carter from Castle Island he underlined, it is not clear who is on the other side of the equation: there is no significant and passionate electorate in favor of anti-cryptocurrency politics. Of the 19% of Americans who own cryptocurrencies, party affiliation is about evenly split. Twenty-one Democratic lawmakersmeanwhile, he joined Republicans in supporting the House bill aimed at overturning SAB 121.
One possible explanation for the Biden administration’s willingness to wage this losing domestic battle is that its real focus is on the threat that cryptocurrencies pose to America’s global banking hegemony. This far-reaching power, like US surveillance of the supposedly neutral SWIFT interbank system, was recently explored by political scientists Henry Farrell and Abraham Newman in their book Underground Empire: How Americans Weaponized the World Economy.
Farrell and Newman describe how almost all global financial transactions at some point pass through US banks and are based on the US dollar. This gives America immense control over such transactions – and in recent years it has used that power much more aggressively, as with the dramatic decision to freeze Russian foreign reserves in response to the invasion of Ukraine.
But Farrell and Newman point out that this is a short-term tactic: the more the United States exercises control of the financial system to punish its enemies, the greater the motivation of these enemies will be to establish new payment channels that do not touch the infrastructure and US services. check. Efforts by BRIC countries to build alternative commercial payment channels have been tentative, but persistent.
But the real nightmare scenario for US financial power is not China regulates oil transactions in RMB — it is the growth of viable crypto infrastructure that makes uncensorable payments universally accessible and attractive around the world. Which he would have stimulate transformative growth removing economic barriers, but it would also undermine an important pillar of American strength.
Perhaps Biden’s ongoing politicization of finance would be more palatable to American voters if the administration were willing to foreground this set of motivations – that is, if they could present their crypto crackdown not as an attack on freedom of the Americans, but as a preemptive move to limit enemies including Russia and China.
But here, as often happens, such long-term international maneuvers have to be conducted under a dark cover. It would be unacceptably provocative if Biden publicly stated something like “America controls all the money in the world, we know it and would like to keep it that way, so we are anti-crypto.” If anything, it would likely push more of America’s strategic opponents to explore cryptocurrencies to circumvent US power.
And so US voters, including many liberals, find themselves pondering what looks a lot like the Biden administration’s domestic financial authoritarianism. For the 20% of American voters who consider cryptocurrency policy important, this will be as appealing as a dog-faced pony soldier.