Date: 02/18/2021
Author: Mr. X
Janet Yellen, President Biden’s pick to be Secretary of the Treasury, is not exactly bullish on Bitcoin. On the same day Robinhood and other exchanges were being grilled before Congress, the presumptive Secretary took a hammer to Bitcoin’s credibility… if you knew what to listen for.
While speaking of the general low interest rates and high valuations, presumptive Secretary Yellen said that there were certain sectors “where we should be very careful.” In this interview, she didn’t specify exactly what she meant. Yet the business press knew that she was talking about cryptocurrency, which is why countless articles are being published today about Janet Yellen going after Bitcoin.
Consider what she said about crypto when she was chair of the Federal Reserve. “It is not a stable store of value and it doesn’t constitute legal tender,” she said. “It is a highly speculative asset.” She also said that the Federal Reserve needed to “supervise” financial organizations to make sure “they’re appropriately managing any interactions they have with participants in the market, and appropriately monitoring anti-money laundering [and] Bank Secrecy Act responsibilities that they have.”
That was in 2017. Since then, Bitcoin has become increasingly accepted in corporate America. Tesla, the Motley Fool, and BNY Mellon are all working with Bitcoin. Mastercard said that it will let some merchants start accepting cryptocurrency payments through its network.
Yet Secretary Yellen does not seem to be happy about these developments. While she admits blockchain is an important technology, she’s consistently called for more regulation.
- In January, before the Senate, she said cryptocurrencies being used to finance terrorism is a “particular concern.”
- In written remarks, she said cryptocurrency could improve the efficiency of the financial system but added that: “I intend to work closely with the Federal Reserve Board and the other federal banking and securities regulators on how to implement an effective regulatory framework for these and other fintech innovations.”
- Earlier this month she said: “Cryptocurrencies have been used to launder the profits of online drug traffickers; they’ve been a tool to finance terrorism.”
- Perhaps most importantly, future Secretary Yellen said certain cryptocurrencies are being used “mainly for illicit financing.”
This is a target on the back of certain alt coins. Certainly, we can imagine some currencies being used to finance terrorists or drug dealers. However, Bitcoin is probably not one of them.
Despite the claims of some of its boosters, Bitcoin is not particularly useful when it comes to secrecy. Given sufficient knowledge and time, skilled analysts can usually determine who owns a particular Bitcoin wallet. Only identifying one of these wallets is enough to usually expose an entire network. Given that, I don’t think Bitcoin itself will be banned. Unlike other assets, government can assert a certain level of control and supervision over it.
However, that doesn’t mean Bitcoin will have it easy. We’re starting to see pushback from journalists and activist organizations because of Bitcoin’s negative environmental impact.
“Mining” Bitcoin today takes a lot of money and a lot of electricity. This power, especially in certain areas of China, is generated by coal. Thus, when Tesla announced its purchase of Bitcoin, many people attacked the company (and Elon Musk) for enabling environmental destruction and rising carbon emissions. One could easily imagine the federal government concocting a “carbon tax” that could penalize owning Bitcoin.
Bitcoin has probably advanced too far for the government to outright ban it. Instead, the government will use Bitcoin as a way to defend the dollar’s status as the world’s reserve current. Bitcoin will be the dollar’s “auxiliary force.”’
The same is probably true of Ethereum, because, as a platform, people are already building applications on top of it. There is a powerful constituency that would oppose government restrictions against ETH and related coins. As we saw with Thursday’s hearings on GameStop, members of both political parties are (rhetorically at least) backing small investors.
With retail trading being one of the few things Americans could actually do to earn money during the pandemic, the amount of people who suddenly have an opinion about things like the capital gains tax has increased. “Financial populism,” meaning a political movement that backs those who own a small amount of capital, could be a potent force in the years ahead.
That said, I do expect the government will move to not only restrain, but possibly ban certain cryptocurrencies. Especially important will be the fate of “joke coins” like Dogecoin. Dogecoin’s rise, even according to its creators, makes no sense. It is rising because celebrities and people on social media are trying to make it rise. It isn’t unfair to say they are manipulating the market – they are flat out saying that people have a kind of moral duty to buy the coin and drive it to a certain price.
It’s all fun and games until someone decides to actually take profits. Despite the innocent intentions of its creators and many (if not all) of its backers, ultimately comes down to a pyramid scam. Unless companies start accepting it as payment, unlikely given its volatility, someone is ultimately left holding the bag.
I expect we will see a case in the next few months of Dogecoin or another alt-coin becoming a cause célèbre. Sympathetic characters who lost money will be championed by politicians and reporters. Another possibility is that an unsympathetic figure or criminal will be accused of being able to operate because of a certain cryptocurrency.
The solutions advanced will be transaction taxes, fees on turning crypto into legal tender, or outright bans on certain currencies will be advanced. Monero, which is probably the best privacy coin out there, is my bet for which one will be targeted.
The promise of cryptocurrency was that it would allow for a financial system that is free of intervention from the state or central banks. I expect that what we will have instead is simply a new sector of the existing system. There may still be certain currencies and platforms that will operate in a legal gray zone – not exactly banned, but not openly accepted by financial institutions and government bodies. For most retail investors, these will be beyond the pale. As depressing as this sounds, it we want to talk about the future of Bitcoin, we must keep our eyes on Washington.
For now, the party continues. However, the new Treasury Secretary has made her priorities clear. If a “victim” of cryptocurrency speculation or “villain” enabled by cryptocurrency starts appearing in the press, you might want to consider taking some profits. It will be a sure sign more regulation is on the way. While stacking cryptocurrency is a sound strategy for now, the environment will eventually change. Make sure your gains aren’t just coming from one sector – or dependent on action or inaction from Washington.
