By John Cassidy, The New Yorker
Compiled by: BitpushNews Scott Liu
Politically, a month can mean a big change. As the lackluster Democratic presidential campaign turned into the “Kamala Harris Show,” Donald Trump’s reelection campaign turned into the “crypto show.” After J.D. Vance, a venture capitalist and cryptocurrency supporter, became his running mate, Trump appeared at a Bitcoin conference in Nashville, promising to build a strategic Bitcoin reserve and make the United States a global Bitcoin superpower. He also promised to fire Gary Gensler, the chairman of the Securities and Exchange Commission (SEC) and a staunch cryptocurrency opponent who had criticized the crypto industry for its “record of failure, fraud and bankruptcy.”
The move was ironic for Trump, who in 2019 said Bitcoin’s value was illusory. At the Nashville event, dozens of cryptocurrency supporters, including the Winklevoss twins and Kid Rock, paid $500,000 each for a private roundtable with the former president, according to CNBC. A few days later, a company owned by Trump listed limited-edition gold sneakers printed with Bitcoin and the words “TRUMP CRYPTO PRESIDENT” online for $500 each. (The shoes subsequently reportedly sold on eBay for as much as $25,000, with one listing even going for $69,999.)
In recent years, the cryptocurrency industry has faced a crisis. In December 2022, Sam Bankman-Freed, the founder of the cryptocurrency exchange FTX, was arrested for defrauding FTX customers of more than $1.7 billion and was subsequently sentenced to 25 years in prison. In November 2023, CZ, the founder and CEO of Binance, the world's largest cryptocurrency exchange, pleaded guilty to failing to combat money laundering and was sentenced to four months in prison.
The bigger threat to the cryptocurrency industry comes from Gensler and his call for regulation of many crypto assets as investment securities, which would subject them to strict investor protection laws and government oversight. The cryptocurrency industry has long argued that investing in cryptocurrencies is more like buying commodities, such as precious metals and beef brisket, which should be regulated by the Commodity Futures Trading Commission (CFTC) rather than the larger SEC.
In September 2022, Gensler said in a speech in Washington that he believed the "vast majority" of cryptocurrency tokens were securities, quoting the agency's first head, Joseph Kennedy: "The SEC will scare businesses that don't do business in good faith." In the following months, the SEC sued a number of leading cryptocurrency companies, including Binance and Coinbase, the largest cryptocurrency exchange in the United States, accusing them of operating unregistered securities exchanges and other violations. Although the defendant companies denied any wrongdoing and tried to dismiss the case before trial. But in March of this year, a federal judge in New York ruled that most of Coinbase's case could proceed. In June, a judge in Washington, D.C. also said that most of Binance's case could proceed. In December last year, a federal judge in New York determined that four cryptocurrency tokens sold by South Korean cryptocurrency company Terraform Labs were securities.
The SEC has also suffered setbacks on this key issue. In July 2023, a federal court in California ruled that the XRP token created by San Francisco cryptocurrency company Ripple Labs was not a security when it was sold publicly. In June of this year, the SEC ended its investigation into Ethereum, the blockchain network second only to Bitcoin. But overall, the SEC has made progress. "People in the cryptocurrency industry are doubling down on political donations," said Dennis Kelleher, president of public interest group Better Markets. "The biggest appeal of the cryptocurrency industry is for Congress to rule that digital assets are not securities, so that the SEC has no jurisdiction."
The scale of donations from the cryptocurrency industry is staggering. According to Bloomberg, three cryptocurrency political action committees (PACs), including the largest Fairshake, raised $170 million from donors such as Coinbase, Ripple, and venture capital firm Andreessen Horowitz. These cryptocurrency funds not only flowed to Trump's presidential campaign, but also to the House and Senate races. Moreover, most of the funds seemed to be intended to defeat Democrats who criticized cryptocurrency, including Senator Sherrod Brown of Ohio and Senator John Tester of Montana, and some of the funds also flowed to other Democrats.
In last week’s primary for Arizona’s 3rd District, Phoenix City Council Democratic member Yassamin Ansari defeated former state Democratic Party Chair Raquel Teran with the help of a PAC-funded ad. More than a dozen House Democrats recently wrote to Democratic National Committee Chairman Jaime Harrison, asking the committee to “take a future-oriented approach to digital assets and blockchain technology” in light of the influx of cryptocurrency funds. However, the fact remains that the cryptocurrency industry’s biggest political supporters are Republicans.
After Trump’s appearance at the recent Bitcoin conference, Wyoming Senator Cynthia Loomis announced that she would propose legislation to establish a “Bitcoin Strategic Reserve” consisting of about one million Bitcoins. (Robert Kennedy Jr., another cryptocurrency supporter, also cheered.) The dark humor is that many in the cryptocurrency community are self-proclaimed libertarians who often argue that one of the great things about Bitcoin is its independence from the government. And now, a Republican senator is proposing to spend more than $60 billion in taxpayer dollars (given Bitcoin’s current price) to acquire about 5% of the entire cryptocurrency supply.
Trump has a more modest proposal that the U.S. government simply hold all the bitcoins seized by law enforcement agencies. What are the economic benefits of holding these bitcoins? James Angel, a financial economist at Georgetown University, said: "The biggest benefit is that it will make the largest bitcoin users vote for Trump."
Many cryptocurrency practitioners would certainly benefit if the U.S. government gave Bitcoin and other crypto assets recognition, but the industry's main goal is to integrate crypto assets into the mainstream investment world while maintaining as little regulation as possible. Kelleher said that we have already seen this story develop. In 2000, the U.S. Congress passed the Commodity Futures Modernization Act, which effectively exempted certain financial derivatives from regulation. These contracts are tied to the price of the underlying asset. In the following years, the issuance of mortgage derivatives, such as credit default swaps, increased significantly. The ultimate financial collapse of many large banks stemmed from these derivatives. When the real estate market collapsed, the value of the underlying mortgage securities collapsed, and the entire financial system collapsed, ultimately leading to the use of taxpayer money to bail out.
The most powerful rebuttal to the potential risks of cryptocurrencies may be that the collapse of digital asset prices has little impact on the broader financial system. (In 2021 and 2022, Bitcoin's value has fallen by more than two-thirds.) But as Kelleher points out, that collapse occurred in an environment where regulators insisted on keeping cryptocurrencies and crypto assets isolated from the financial system. "Imagine if the collapse had occurred in a situation where cryptocurrencies were deregulated and fully integrated and connected to the banking system," Kelleher said. "There would be countless derivatives whose value is tied to the price of Bitcoin, and these liabilities would be spread across the balance sheets of banks. Then we would be back to the situation in 2008."
That might be the worst-case scenario, but the bigger problem is this: We’ve already seen the dangers of lax financial regulation. Mortgage-backed securities at least serve a larger social purpose, such as expanding homeownership. Even if someone finds crypto assets that can help society significantly, they’ll choose to keep it to themselves. But don’t tell that to the Mar-a-Lago crypto believer who’s raising money for his campaign and selling sneakers.
