Why to Not Ban Crypto
The Business Case for Crypto in the US
Regulatory action, policy and indictments have flooded the US crypto landscape this year. I explained the litany of measures and their consequences in Crypto Crackdown: Regulators Mount Up. The intention is to limit access to crypto. It’s unclear if the actions are broadly endorsed by politicians, encouraged by the White House or perhaps one man’s way of deflecting attention. The SEC is the most spirited regulator. Its Chairman had close ties with FTX.
We’re engulfed in the regulatory noise. Debating legal merits. Hotly contesting the viability. We should put that aside. It’s not the most important question to answer. The most important question to answer is:
Why should the US not ban crypto?
There is a constitutional argument. Banning crypto breaches free speech. That defense has moral ground. There is an argument that governments aren’t able to ban crypto. Crypto is decentralized and censorship resistant. That’s true in parts. But China has mostly banned crypto. The US appears to be ostracizing crypto-related business from the financial system.
The morality and capability arguments aren’t the strongest. A more compelling argument is the business case for why the US should enact constructive regulation instead of destructive.
The business case is rooted in two precepts. First, fostering innovation is economically beneficial. Second, crypto does not necessarily undermine US hegemony.
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Innovation is good
The US cemented itself as the world superpower in the 20th century. Technological innovations birthed in America fortified its world standing. The Carnegie Bessemer steel plant opened in Pennsylvania in 1875. It pioneered cheap steel production that revolutionized manufacturing, construction and transportation. The Model T was produced in Michigan in 1908. It reinvented transportation and city design. Manufacturers of all products replicated Ford’s assembly line concept. The semiconductor was invented in California in 1971. It lay the foundation for computing, telecommunications, the Internet and smartphones.
American culture is rooted in trailblazing new ways. In dreaming big and daring greatly. That ethos spawned 150 years of innovation. America has unquestionably benefited from it. Rising living standards, migration of talent, capital formation and economic growth are propelled by innovation. America has a rich history of fostering and supporting technological innovations. A few innovations are revolutionary, some are enhancing, many are flops. But even the flops sow the seeds of future innovation.
America has experienced first hand that innovation is good. Innovation is American.
So why is America hampering crypto’s innovation?
One argument is that Americans have lost money in crypto and it’s ripe with fraud. Both are correct. But it’s nothing new. Speculation and fraud was rife in the dotcom era. The Nasdaq increased 5x from 1995 to its peak in 2000. By 2002 the Nasdaq had fallen 80%. An estimated $5 trillion was lost. The Nasdaq and S&P recovered their 2000 highs 15 and 19 years later respectively. The collapse surfaced two of the largest frauds in US history: WorldCom and Enron.
The dotcom crash was magnitudes worse than crypto’s 2022 route. Yet the response from regulators was not to regulate the internet’s innovation. Speculation and fraud are usually not enough to stymie innovation. I described in My Crypto Thesis that speculation is a necessary part of boom and bust innovation cycles.
So if it's not because of speculation and fraud, why is America hampering crypto’s innovation?
Crypto challenging US hegemony
Crypto could threaten US hegemony. That’s what has government and regulators worried. Crypto is in a category with artificial intelligence and genome editing. The way these technologies develop will have a dramatic impact on the world and the US’ role within it.
I use crypto as a catch all for everything relating to blockchains, crypto currencies, tokens and applications built on chain. The ‘currency’ part is what threatens US supremacy. It is not in the US' favor to have another currency rival USD’s dominance. That goes for the pound sterling, yen, euro, renminbi, bitcoin or any crypto currency.
The US has a competitive advantage that no other country has. Its currency is the reserve currency of the world. That means large quantities of USD are held by central banks around the globe. It is widely used to conduct international trade and financial transactions. Approximately half of global trade is invoiced in USD, yet the US accounts for only 10% of global trade. Roughly 50% of cross-border loans and international debt securities are denominated in USD. The US share of world GDP is 20%, yet 60% of all international reserves (cash held by non-US entities) is denominated in USD.
The world operates in USD. There is always a buyer of USD. Foreign countries and companies need USD to operate. That’s why $7 trillion, or 33%, of US Treasuries, are owned by foreign entities. Roughly $1 of every $3 of debt issued by the US government is bought by foreigners. As a result, the US can fund itself with debt more easily. Debt fuels US’ growth. No other country is in a similar position.
The US will not willingly forfeit its global reserve currency status. It would be equivalent to ceding its hegemony.
The importance of the USD, along with the US’ power, has already waned. USD’s share of foreign reserves has declined from 72% in 2000 to 57% today (note the graph on the right side in the above illustration). Other fiat currencies have gained in popularity.
Crypto currencies, more specifically bitcoin, conceivably threaten USD. A rival currency untethered to nation states, like bitcoin, could take share from USD in reserve deposit and trade denomination. That would be decidedly bad for American supremacy. It would reduce the demand for USD, jeopardize its global reserve status and thwart the US’ funding advantage.
But it doesn’t need to be that way.
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Crypto supporting US hegemony
The proliferation of a USD backed stablecoin could strengthen US economic power. It would reinstate USD as the global reserve currency. USD backed stablecoins are digital dollars. Anyone in the world can use USD backed stablecoins. No bank account is needed to transact in them. Transactions are settled for pennies or less and instantaneously. USD backed stablecoins provide a more efficient way to transact. It’s not new money, it's the same money in a technologically superior way. If America is a pioneer in USD backed stablecoins, more transactions will be denominated in them. They could enshrine USD’s global reserve status.
Critics of this theory claim it is not decentralized. They’re sort of correct. Asset backed stablecoins have a point of failure. The USD backing the stablecoin is held in an account by an entity and audited by a third party. Perhaps in time that will improve. The value of USD stablecoin is determined by the health of the US economy. Bitcoin is immune from both of these shortcomings. But once on chain, the USD backed stablecoin is beyond restrictions.
I think we’ll have a world with USD (and other currency) backed stablecoins and bitcoin. It won’t be a question of one or the other. People and central banks can decide which they prefer as a store of value. Trade partners can choose if they want to transact in USD backed stablecoin or bitcoin. Heck we’ll probably even get a Central Bank Digital Currency. These different forms of money are competition. They introduce choice; that’s a good thing.
The proliferation of a USD backed stablecoin needs support from US institutions. People need to be confident that the USD backing the stablecoin can’t be jeopardized. I think US institutions, and Americans, are willing to play ball if it solidifies the USD’s standing. Crypto could actually strengthen the US' global power.
The business case of US crypto
We can debate the merits of crypto regulatory actions, extol the moral argument or simply make the business case. The business case is the most compelling. It’s what Americans listen to most. Innovation, crypto included, is good for the economy. US history proves it. Crypto doesn’t need to undermine US hegemony, in fact, it can support it.
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