Bitcoin or Bitcrime

 

“Whether you’re Binance or Ethereum, Dogecoin or Bitcoin, this is a great bill.”

Florida Representative John Snyder, a Palm City Republican, referring to a law exempting crypto exchanges and coins from state securities laws.

Cryptocurrencies exist as a parallel, decentralized form of “money,” protected through a massive, electricity gobbling (lots of file servers) combination of an open access “platform” (literally a digital ledger like Ethereum or Bitcoin) and a litany of digital codes, stored across many file servers (digital lockers), which codes must be combined to release and deploy the “currency.” Blockchain is like a huge, multiparty controlled digital combination lock. Think of all of this as a massive peer-to-peer currency network without any centralized control or policy. There are few cracks in the system that have resulted in theft, and entire cryptocurrencies have been completely hijacked. Although these nightmares are rare, the extreme volatility of cryptocurrencies, for example rising and falling 30% in a single day, is simply part of the risk. 

A cryptocurrency user opens an account on one of many sites with differing currencies (Bitcoin is the largest) or downloads an app… buys the desired amount of crypto (which is recorded on a digital platform)… and is able to pay in crypto or simply hold the crypto as an “investment.” Lots of folks have made a whole pile of money on these platforms… others, well, not so much. Skeptics worry, with some justification, that some obvious negative challenge to any one or all cryptocurrencies could cause a complete collapse. A 1929-like fall of the crypto world. And although the Biden administration has ordered all federal agencies to come up with updated proposals to regulate this field, it is still the wild, wild west of uncertainty.

Traditional currencies, like dollars, pounds and euros, are predicated on the widespread faith in the underlying nation and its economic policies. The way of national currencies “backed by gold reserves” has faded. The United States abandoned the gold standard in 1971. Cryptocurrencies likewise are built around a faith in the blockchain security system and the underlying expected supply and demand realities. Faith. Stories of legendary wealth, the machinations of Elon Musk and obvious evidence that even some countries, notably El Salvador, have even officially recognized crypto as government sanctioned tender have moved the crypto value meter up. That Crypto.com (an exchange where crypto can be bought, sold, traded, etc.) paid $700 million just for naming rights for the arena (above), where the Los Angeles Lakers, Clippers and Kings play, created many new crypto believers. 

While some countries are going the opposite way of El Salvador – China has banned cryptocurrencies – here in the United States, the federal government still treats these currencies as securities – like stocks and bonds. That these virtual currencies can be used for hard-to-trace dark market transactions, to move ill-gotten gains freely (money laundering), in drug trades, or avoid taxes, seems to slip by. Note, the current IRS forms ask if you have engaged in any crypto deals, and if you did but do not check the box, you can add perjury to a possible charge of tax evasion. If a parallel currency system gets large enough, that could also negate a nation’s ability to impose and enforce its monetary and fiscal policies.

Most solicitations and trades in passive investments are regulated by so-called securities laws. These consumer/investor protection statutes came as a direct result of the 1929 Wall Street market crash, and by 1934 federal securities laws rose to cover any transaction that crossed state lines. Likewise, every state in the union also adopted securities laws that applied to local fund raising, often releasing when a “security” was listed on a nationally accepted exchange (like the NYSE). With the rise in cryptocurrencies, we have recently witnessed a new trend, mostly in states that prioritize corporate values over individual and consumer protection: the exemption of cryptocurrency trading from state securities laws with a hope that the feds will follow.

With midterms approaching and candidates’ hands extended, it is no wonder that now well-heeled crypto companies have wrangled their way into state legislatures and have actually drafted those statutory exemptions. The “swampland for sale capital of the US” – Florida – has once again undistinguished itself in leading this campaign of state statutory exemptions to existing consumer protection laws, knowing that the federal Securities and Exchange Commission, the federal enforcement agency, is woefully unprepared and understaffed to deal meaningfully in this field… not to mention the dearth of needed SEC regulations.

Last month, after four-minute debate, the Florida House passed the lobbyist-drafted exemption bill, quickly followed by the state Senate. It was instantly signed into law by the governor. Writing for the April 10th New York Times, Eric Lipton and David Yaffe-Bellany fill in some of the details: “Florida’s warm embrace of the cryptocurrency agenda is just the tip of an aggressive industry-led push to position states as crypto-friendly beachheads. Across the nation, crypto executives and lobbyists are helping to draft bills to benefit the fast-growing industry, then pushing lawmakers to adopt these made-to-order laws, before moving rapidly to profit from the legislative victories…

“Many states are racing to satisfy the wish lists from crypto companies and their lobbyists, betting that the industry can generate new jobs. But some consumer advocates worry that this aim-to-please effort could leave investors and businesses more vulnerable to the scams and risky practices that have plagued crypto’s early growth.

“In Florida, the new money-transmission legislation emerged from a monthslong collaboration between Representative Vance Aloupis Jr., a Republican of South Miami, and Samuel Armes, who is starting a cryptocurrency investment firm, Tortuga Venture Fund… ‘Vance has been an incredible asset to the blockchain and crypto community,’ Mr. Armes said.

“Similar teamwork has been on display in Wyoming, North Carolina, Illinois, Mississippi, Kentucky and other states, according to a New York Times review of state legislative proposals and interviews with legislators and their industry allies… At least 153 pieces of cryptocurrency-related legislation were pending this year in 40 states and Puerto Rico, according to an analysis by the National Conference of State Legislatures. While it was unclear how many were influenced by the crypto industry, some bills have used industry-proposed language almost word for word. One bill pending in Illinois lifted entire sentences from a draft provided by a lobbyist.”

Digital currency, in fact almost everything that flies across the worldwide Web, is confounding state and federal legislators and regulators. They are breathlessly running behind the changes, trying to shoehorn both legitimate malignant practices into constitutional and statutory paradigms, with limited success. At least the federal government has sufficient expertise to evaluate the risk, an ability that is countered by partisan polarization and a snail-paced legislative process. Watching seriously uninformed state legislators, however, dive into shark infested waters after being assured by questionable lobbyists that water is safe… well, this could get very ugly very fast.

I’m Peter Dekom, and just embracing a new parallel currency with massive potential for fraud and abuse, without really understanding the risks, is becoming typical of the new plutocracy that is defining an increasing part of American governance.