America's War on Crypto

The crypto industry recently held a Consensus 2023 industry event in Austin, Texas. It was a 3 day event featuring numerous panels/sessions with speakers/representatives from both crypto and non-crypto companies/industries as well as representatives from various government regulators.

The event covered many topics including:

• efforts by large, mainstream companies like PepsiCo that are looking for opportunities in the crypto space
• a merger of traditional finance with blockchain governance
• plans by large banks to innovate in tokenizing traditional-financial assets

Crypto isn't just the wild west purview of money launderers and dark web ne'er do wells. There is serious financial/corporate activity happening in the crypto world now.

Valid Criticisms or Propaganda?​

Anti-crypto voices have tried to vilify the crypto industry on environmental concerns - claiming that crypto consumes too much energy. However, like most nascent technologies, they evolve with innovation when there is sufficient interest.

Bitcoin (BTC) was the first crypto coin and it was built on a "proof of work" model. This model is energy intensive by design and it also didn't scale well for handling a large volume of transactions. So, "proof of stake" crypto were developed that were orders of magnitude more efficient and scalable. Ethereum (ETH) transitioned from a proof of work model to a proof of stake model for this reason - and it's still not done being developed. Stellar (XLM) was developed on another "proof of agreement" model that claims to be several more orders of magnitude more efficient than proof of stake models - and even more energy efficient than traditional finance like credit cards:

Electricity Consumption of a Distributed Consensus Algorithm | LUP Student Papers

The efficiency of proof of work and proof of stake based cryptos are still being improved in many cases by the development of new technologies like parallel blockchains (aka parachains, cross chains, etc.) that distribute transaction loads and zero knowledge proofs (which could be very significant for Bitcoin in particular).

In addition to the developers of various crypto projects being sensitive to the energy costs from a design standpoint, the decentralized network of node operators (and bitcoin miners) that implement the crypto protocols (than operate the computer servers on the network) are also increasingly using more green energy sources:

... There has also been a shift toward using more renewable energy sources to power cryptocurrency mining. One 2020 study found that around 39% of the energy consumed by PoW cryptocurrencies is from renewable energy sources, up from 28% reported in a previous study. This percentage is likely to rise as renewables become more affordable in the future.
...

Biden's 30% Crypto Electricity Tax May Be Too Blunt A Solution

In his latest budget for Fiscal Year 2024, President Biden has proposed a new tax on electricity use from cryptocurrency mining.

www.forbes.com

Crypto Threatened by Government Hostility​

The Biden administration has been very open about their hostility to the crypto industry:

It’s a safe bet that 80-year-old President Biden—like his 76-year-old predecessor—has never bought Bitcoin, used a stablecoin, or tried out Web3. But that didn’t stop Biden’s underlings at the White House from issuing a blog post on Friday, decrying crypto as predatory and dangerous. The document reads like a diatribe and even has a whiff of moral panic—as if Biden had instructed the makers of Reefer Madness to turn their attention to digital currency.
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The Biden White House just rolled out some of its most anti-crypto language yet. They may regret it

The White House rolled out an aggressive anti-crypto stance that could come to bite Democrats in the long term.

fortune.com

The White House Council of Economic Advisers delivered a 35-page takedown of the idea that digital assets like Bitcoin are useful as an alternative to government-backed currency, the claim that crypto’s underlying distributed ledger technology could have some utopian application, and the notion that it could serve as a hedge against inflation.

“Although the underlying technologies are a clever solution for the problem of how to execute transactions without a trusted authority, crypto assets currently do not offer widespread economic benefits,” the council writes. “They are largely speculative investment vehicles and are not an effective alternative to fiat currency. Also, they are too risky at present to function as payment instruments or to expand financial inclusion.”

The extended crypto criticism, which fills one chapter in a book-length annual report the White House sends to Congress each year, represents a stark change in tone from President Joe Biden’s administration.

One year ago, Biden signed an executive order asking federal agencies to look at ways of curtailing the risks of crypto without stifling “financial innovation.” This week’s report makes clear the White House thinks crypto can’t innovate much besides the same kinds of financial disasters that prompted Congress to regulate the banking industry a century ago.
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White House Slams Crypto As Offering 'No Widespread Economic Benefits'

The Biden administration has soured on crypto after several high-profile industry failures.

www.huffpost.com

Crypto faces similar hostility within the legislative branch from a group of Senators led by Elizabeth Warren.

...
Now, influential Democrat senator Elizabeth Warren has signaled she's "building an anti-crypto army" as part of her re-election campaign following a warning from crypto lobby group Coin Center that a crackdown on TikTok could pave the way for a bitcoin ban.

"I’m in this fight to put our government on the side of working families," the former U.S. presidential hopeful posted to Twitter, embracing a quote from a recent Politico profile that said she's "building an anti-crypto army."

Warren, who is on the Senate Banking Committee that oversees the U.S. Securities and Exchange Commission (SEC), has been at the vanguard of a slew of anti-bitcoin and crypto bills that have been introduced over the last year.
...

Elizabeth Warren Is Building An âAnti-Crypto ArmyââFeeding Serious U.S. Bitcoin Ban Warnings

Bitcoin and crypto companies are struggling with the growing possibility that the U.S. is trying to "quietly" ban bitcoin...

www.forbes.com

Three Pronged Attack​

The American government is currently employing a three pronged attack on the crypto industry in an attempt to suffocate it.

Prong number one makes headlines in most news media and involves the SEC purposefully maintaining vague guidance and attacking companies with lawsuits. Their behavior has been so egregious that it has drawn dissent from their own ranks and from Congress. The SEC has apparently been tasked to be the Biden administration's Shawshank warden Samuel Norton in obtusely responding to the crypto industry. There really isn't any other way to explain SEC chair Gensler's blatant hypocrisy.

Prong number two has flown under the radar of most news media and involves the revival of Operation Choke Point - an Obama era program that aimed to de-bank lawful industries that the administration disfavored. The operation was shut down circa 2017, but is now making a comeback targeting the crypto industry. Cooper & Kirk, a law firm that sued FDIC, OCC & Fed over the original Operation Choke Point, published a detailed summary of Operation Choke Point 2.0.

Former Congressman Barney Frank, a board member of Signature Bank, alleged that the bank was solvent and seized by regulators to debank it's crypto clients. The move sparked contagion in the regional banking industry and prompted some members of Congress to question the FDIC's actions. When the FDIC solicited bids for Signature bank, they split off Signature's crypto clients effectively de-banking them.

The third prong involves legislation and executive orders designed to handcuff the crypto industry including increasing taxes on bitcoin miners and regulations.

Stablecoins - Kind of a Big Deal​

Stablecoins, such as US Dollar Coin (USDC) and Tether (USDT), are cryptocurrencies that are backed by national currencies. They are essentially tokenized forms of the underlying legal tender they represent. Unfortunately for the Federal reserve, US Treasury Dept., etc., they enable transactions that do not process through the US banking system. As such, they have drawn particular interest from the Biden administration.

Stablecoins provide an open door for global entities to conduct dollar denominated transactions that could bypass US sanctions. They provide an opportunity for people in nations with high inflation to save money in dollar denominated currency that bypasses official dollar exchanges (or prohibitions). The adoption and growth of stablecoins would appear to be a direct threat to any possible plans for a Central Bank Digital Currency (CBDC).

Futile and Stupid Gesture​

The Biden administration's effort are provoking a chilling effect of the domestic crypto industry and forcing much of America's leadership in innovation and development to expatriate to friendlier shores. What the Biden administration does not appear to realize is that crypto is global. They are not going to be able to choke the global industry with an iron fist. Pandora's box has been opened. The crypto industries will continue to innovate and grow with new financial and commercial applications. It will be a true shame if America abdicates their position in leading the charge.

 

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I think it's fair to say that the U.S. Securities and Exchange Commission’s (SEC) investigations and enforcement actions against crypto companies has now escalated into an all-out legal war, with crypto companies filing lawsuits and rolling out entire press approaches to tackle the SEC.
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Breaking it down

Last month, Ethereum developer ConsenSys pre-emptively sued the SEC for injunctive relief. The firm asked a federal court in Texas to block the regulator from investigating it, bringing charges against the MetaMask wallet or MetaMask services and to declare ether (ETH) a not-security. In an unredacted version of the suit filed later, ConsenSys alleged that the SEC launched a formal investigation into whether ETH was a security (though the SEC does not appear to have actually come to a conclusion yet, based on the filing).

They join the DeFi Education Fund and a company called Beba, who sued the SEC at the beginning of the month, the Blockchain Association and Crypto Freedom Alliance of Texas, who sued earlier in the week over how the SEC is defining a "dealer" and a company called Lejilex, which wants to launch a crypto exchange literally called "Legit.Exchange." Each of these lobby groups or companies has been sued on various charges. Still, they share the same fundamental view: that the SEC is overstepping its boundaries in how it regulates crypto or that the fundamental question of how crypto fits into securities laws needs a more definitive answer.

It’s a growing tactic among crypto companies, which pointedly filed in federal districts known for being less than wholly supportive of the administrative state.
...

More:

https://www.coindesk.com/policy/2024/05/08/the-crypto-lawsuit-state-of-play/?

 

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The U.S. House of Representatives voted Wednesday to approve a resolution rejecting Securities and Exchange Commission (SEC) cryptocurrency accounting guidance that the industry said has deterred banks from handling crypto customers, but President Joe Biden is already promising he'll veto the effort if it hits his desk.
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https://www.coindesk.com/policy/2024/05/08/house-poised-to-vote-on-erasing-sec-crypto-policy-while-president-biden-vows-veto/

 

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This could have fit in the crypto crime thread or the We the People forum (once charges are actually filed), but IMO, it really belongs here because this isn't about crime - it's about the War on Crypto. It's really about the fundamental issue at the heart of it all.

On April 24, two lead developers of Samourai Wallet (SW), the most-advanced privacy-centric wallet in the bitcoin ecosystem, were arrested and charged with money laundering and money transmitters offenses by order of the United States Department of Justice (DOJ). This is just the latest assault of an escalating war waged by US regulators on financial privacy and freedom.
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The actions of the DOJ are not by chance but by design: the objective is not to combat crime but to drain liquidity from crypto tools that make it possible for individuals to escape the traditional financial system. ...

More (highly recommended):

The Arrest of Samourai Wallet Developers Shows the US Government Hates Privacy and Freedom | Mises Institute

As federal prosecutors expand the government's definition of crime, more and more people are swept up despite the fact they have harmed no one.

mises.org

 

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A bipartisan pair of U.S. senators is questioning Attorney General Merrick Garland about the "unprecedented interpretation" of law the Department of Justice (DOJ) is using to pursue cryptocurrency software services as unlicensed money-transmitting businesses.

Sens. Ron Wyden (D-Ore.) and Cynthia Lummis (R-Wyo.) sent a letter to Garland questioning the approach against such firms as Samourai Wallet and Tornado Cash, highlighting that the Treasury Department's Financial Crimes Enforcement Network (FinCEN) has previously held that non-custodial crypto services shouldn't be treated as money transmitters.
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https://www.coindesk.com/policy/2024/05/13/us-senators-question-justice-departments-pursuit-of-crypto-mixers/

The letter:

May 9, 2024​

Hon. Merrick Garland
Attorney General of the United States
950 Pennsylvania Avenue, N.W.
Washington, D.C. 20530

Re: Money Transmitting Business Registration and Non-Custodial Crypto Asset Software

Dear General Garland,

We write to express our grave concerns regarding the U.S. Department of Justice's (DOJ) recent policy arguments that dramatically expand the scope of the Federal prohibition on operating an unlicensed money transmitting business.1 The DOJ's unprecedented interpretation of this statute in the context of non-custodial crypto asset software services contradicts the clear intent of Congress and the authoritative guidance of the Department of the Treasury's Financial Crimes Enforcement Network (FinCEN). This interpretation threatens to criminalize Americans offering non-custodial crypto asset software services.

The Federal money transmitting business statute (18 U.S.C. § 1960) makes it a criminal offense to “knowingly conduct … an unlicensed money transmitting business.”2 Criminal liability applies when a person: (1) was required by a State to become licensed as a money transmitter; (2) when a person is required by Federal law to register; or (3) if the person is engaged in money transmission (whether registered or not) and is engaged in illicit finance.3

The Bank Secrecy Act (31 U.S.C § 5330) defines “money transmission” as “accepting currency, funds, or value that substitutes for currency and transmitting the currency, funds, or value that substitutes for currency by any means.”4 The use of the term “accepting” which is commonly defined as “to receive (something offered) willingly”5 provides clear evidence that Congress intended a requirement that a money transmitter have taken control of users’ assets as the sine qua non of activities within the scope of the statute.

FinCEN regulations mirror this language regarding acceptance and transmission. The relevant rule states that money transmission “means the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means.”6 The statutes and regulations are clear that direct receipt and control of assets are required elements of money transmission. Indeed, this limiting factor is essential, otherwise a wide range of additional services such as internet service providers or postal carriers could inadvertently be caught in the definition of a money transmitting business since they routinely send, receive and process information and messages regarding payments.

Consequently, non-custodial crypto service providers cannot be classified as money transmitter businesses because users of such services retain sole possession and control of their crypto assets. At no point when operating or providing non-custodial services do such service providers "accept" crypto assets from their users. At all times, users retain exclusive custody and control over the private keys to their crypto assets. All transactions are signed and processed on the user’s local device without third party access.

Consistent with Congress’ intent, statutory language and existing regulations, FinCEN has consistently taken this same position in published guidance that non-custodial services are not within the scope of money transmission registration requirements. Over a decade ago, FinCEN published guidance which explained that activities which “involve neither ‘acceptance’ nor ‘transmission’ of the convertible virtual currency . . . are not the transmission of funds within the meaning of the Rule.” 7 Additional FinCEN guidance from 2019 further confirmed that the definition of “money transmitter” is anchored in the custodial function of the putative registrant with relevant factors including “where the value is stored” and “whether the person acting as an intermediary has total independent control” of the assets.8 FinCEN explicitly held that “in so far as the person conducting a transaction through the unhosted wallet is doing so to purchase goods or services on the user’s own behalf, they are not a money transmitter.”9 Contemporary analysis of this 2019 guidance by law firms clearly establishes this fact as well.10

Consequently, as the primary interpretive authority for the Bank Secrecy Act and Federal money transmitting business registration requirements, FinCEN has clearly established that non-custodial crypto asset software—where the developer or publisher of the software does not have unilateral control of user assets—are not subject to money transmitting business registration, just like existing internet service providers are not required to register when routing data packets between a customer and their bank. It is very concerning that DOJ would adopt an interpretation of this registration requirement that is contrary to another Federal agency.11 This makes it difficult for ordinary Americans to determine what their legal obligations are.

This reasoning also comports with common sense. Assets like Bitcoin may be natively digital, but they are not amorphous such as heat or electricity. Bitcoins have a clear unilateral owner at all times. If a user wishes to transfer Bitcoin to someone else, they use their private key to sign a transaction which transfers the Bitcoins to a new address. At no point in the transaction process is there uncertainty over where ownership resides. Custody and control are, therefore, the logical touchstone of where “acceptance” and “transmission” occurs on Bitcoin or other crypto networks, just like traditional assets. Analogies to heat or data transfer via USB made by the DOJ fundamentally misunderstand how this technology operates.

The DOJ should not diverge from the clear, logically sound, and well-established definition of “money transmission” established by FinCEN. Subjecting developers of non-custodial crypto asset software to potential criminal liability as unregistered money transmitters contravenes the well-established interpretation of this provision and will only serve to stifle innovation and shake confidence in the DOJ's respect for the rule of law.

We urge you to discard this flawed interpretation of Section 1960. Safeguarding the rule of law and nurturing the development of transformative technologies are not mutually exclusive, we expect that the DOJ can chart a wise course that accomplishes both.

https://www.lummis.senate.gov/wp-content/uploads/Lummis-Wyden-Letter-on-Non-Custodial-Crypto-Asset-Software.pdf

 

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Twitter/X is on fire this morning with folks mocking Elizabeth Warren over this.