Pulling The Football Away

For the younger crowd that might read this, they might not understand “pulling the football away” so here is where that phrase comes from.

The US Treasury, the Biden Administration, and the Congress (Democratic-led don’t forget) just played Lucy to the cryptocurrency industry.

Fred Wilson opined how happy he was with the progress of crypto regulation talks the other day.  Fred didn’t realize the sausage wasn’t made yet.  What Democrats like Fred don’t see is that regulation isn’t used to make an industry better or more efficient.  It’s used to eliminate competitors, and most importantly to increase government power.

I recall doing legislation when I was on the CME Board.  Congress snuck in a transaction tax that had to be eliminated literally in the last minute before it was passed back in 2000.

a16z, a huge VC fund, put out a fact sheet on the legislation.  This was good only because 99% of Congress has no idea what crypto even is.  Instead, all branches of government pattern matched and tried to force crypto into a corner it doesn’t belong in.

Republican Senator Ted Cruz had it right.  Do nothing.  Let it breathe.  The Lummis/Wyden/Toomey bill was the compromise bill that should have been passed in the pork-filled infrastructure bill, which is a bad bill anyway.

The US Treasury was having none of that, and neither was Biden.  They want more tax dollars wherever they can find them.  The damage might be able to be fixed, but lines in the sand have been drawn. Existing crypto markets were up slightly after passage.  That should be no surprise.

The most dangerous facets of this bill are the opportunity costs of the bill and the power grab by the government.  The government just increased the cost of working with cryptos.  That will decrease competition for legacy analog systems, and for the cryptosystems that have been started up to compete.  But what is far far worse is the opportunity costs when you think about innovation that could happen but won’t because the hurdles have just been raised.

One huge opportunity cost is that innovation will not be executed in the United States.  The US has the most innovative culture in the history of mankind.  Things happen faster here.  Access to capital is better here.  The old cowboy mentality that settled the west permeates the tech culture of the US.  Crypto benefitted from that culture.

As a person from the financial industry who told Congress that if they did X, things would move offshore, I know the argument well.  In our case, we had a couple of concrete examples and we had existing numbers that showed in accounting terms how much the damage would be.  For crypto, it’s all based on optimism and hope.  The offshoring argument is a hard one to drive home to Congresspeople and apparatchiks in the government that don’t understand opportunity costs and have no concept of how to think out of the box.

Who might have an interest in killing crypto outside of banks and financial institutions?  How about telecom companies?  Helium could replace a lot of what they do.  How about cloud infrastructure companies like Microsoft and Amazon?  Filecoin could compete with them someday.  There are crypto companies trying to make the power grid more efficient.  There are other nascent efforts that threaten legacy systems in other industries.  All these efforts if successful will increase competition and make goods and services cheaper allowing more people to access them.

Crypto isn’t about tax avoidance and laundering money for illicit activities.  It’s easier and cheaper to do that in existing legacy systems.  What most people fail to understand is that when innovation happens, it is highly likely distasteful segments of the market adopt it first.  For example, the porn industry latches on to any innovation it can find to make how they distribute and serve up what they do better.  But, then the general public who has no desire for the stuff the porn industry has got streaming television, streaming radio, and video sites like YouTube.

That sort of evolution happens time and time again when it comes to tech.

Cryptocurrency isn’t simply about speculation, payments, and transactions.  It’s multifaceted.  It can bring a lot of efficiency into markets that need it or are too expensive to be made efficient with current legacy systems.  Speculation now is actually a positive part of crypto because it provides capital for ideas.  Many of them won’t work and speculators will lose some money.  But, they are taking risks, and when you take risks sometimes you fail.

The US Federal government totally blew it.  As politicized as all parts of the government have gotten over the last twenty years, the abject failure of the Senate here shouldn’t be a surprise.  That’s on Democratic Senator Chuck Schumer who is the de facto Senate leader.  Would it have been better with a leader like McConnell?  We won’t know but the fight would have still been uphill and tough given the stance of the White House and US Treasury.  The industry might have had a better shot.

What was surprising to me is that Senators from different political constituencies and areas of the country came together to actually formulate a potential bill that would have put a fence around government intervention.  They were steamrollered by establishment politicians on both sides of the aisle.

The end result is Americans will get hurt and a lot of the innovation as it pertains to crypto will be done offshore.   That opportunity cost will be very high as cryptocurrency is the future of the internet.

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