Cryptocurrency competition should be welcomed by Congress

Members of Congress have grown increasingly concerned that cryptocurrencies may jeopardize the dollar's status as the world's reserve currency as they have grown in popularity. The emergence of cryptocurrencies, on the other hand, is advantageous to the dollar. Recognizing this truth and supporting a competitive currency market would enhance the dollar today while also ensuring its future role as the world's reserve currency.

Money competition occurs when people have the freedom to pick the currency that best suits their needs, and currency issuers compete to meet those demands. One of the main goals of currency competition, according to F. A. Hayek, is to keep prices low.

To put it another way, allowing currency competition would bring market forces into the sphere of money. Given that many people assume that only a national domestic government is capable of producing currency, this notion may look unusual. Government monopolies on money, on the other hand, are a comparatively new phenomenon: the central banks of the United States and Canada, for example, were only established in 1913 and 1935, respectively. And there are several examples of private currency issuers throughout history. Furthermore, the countries that have embraced dollarization are clear instances of how advantageous currency competition can be.

Competition would bring the motive and inspiration to issue better money in circumstances where government monopolies have long preserved issuers of bad money. That second feature—inspiration for issuing better money—is particularly crucial to grasp since, in the absence of alternatives, all issuers are able to better observe public preferences and improve the appeal of their currency. "World economies work best when you have a highly participatory... marketplace where people can swap things, products, and currencies," Rep. Byron Donalds (R-FL) stated of the benefits of currency competition. When there are various possibilities, it is essentially to the benefit of all currencies."

Although cryptocurrencies have not yet become a widely recognized form of payment in the United States, their early success reveals three crucial aspects of what Americans want to see change with the dollar and traditional banking. Congress should keep in mind that the success of cryptocurrencies is due in part to their ability to deliver improved financial privacy safeguards, faster payment clearing, and greater openness in monetary policy control. Learning from the success of cryptocurrencies and boosting the dollar's utility would be more beneficial to the dollar's standing as the world's reserve currency than any move to limit the market.

Due to worries about privacy and trust, millions of Americans hesitate to open a bank account. Despite this, in the fall of 2021, Congress mostly ignored these concerns and attempted to reduce bank reporting standards to just $600, a move that was overwhelmingly opposed by voters (66 percent). While the Fourth Amendment to the United States Constitution should protect individuals from the government invading their privacy, that protection no longer applies to most financial records. The mere act of having a bank or exchange account is viewed as a surrender of one's financial privacy under the third party theory.

By eliminating the third party, the decentralized nature of many cryptocurrencies overcomes the issue of the third party theory. If financial investigators want to access comprehensive private information about the persons engaged in a transaction, they must either gain permission from the account owner or obtain a warrant from a judge. This subtle shift in transactional behavior has brought in a new era of financial possibilities, as well as a new generation of Americans who are aware of how little their financial privacy is secured under the current system.

Congress could alter the Right to Financial Privacy Act (RFPA) to tighten financial privacy protections. The RFPA established a formal process for obtaining consumer information and limited how the government could use it.

Unfortunately, the statute contains numerous exclusions that drastically limit the safeguards it affords. None of its safeguards, for example, apply to financial information obtained under the Internal Revenue Code or other sorts of government inquiries. These statutory exceptions should be repealed, so that information needed for investigations can only be obtained by a court order.

The payments system that facilitates dollar transfers (i.e. Fedwire) is both inefficient and antiquated. "America's payment system appears more like it belongs to a developing nation than to one of the wealthiest countries on the planet," wrote George Selgin and Aaron Klein. The problem with the US payment system is that payments, such as a paycheck, can take three days or longer to settle and become available in the recipient's account. Fedwire is closed on weekends and holidays, which contributes to the delay.

Cryptocurrencies, on the other hand, are not bound by antiquated "banker's hours." Funds can be transferred and cleared in minutes or less, not days, if you have access to the internet. When one has a steady or ample financial flow, it's easy to overlook the benefits of such transfers. Faster payments, on the other hand, can make a significant difference for people who live paycheck to paycheck and for those who are affected by natural disasters or other crises.

To improve payment speed, the Federal Reserve (Fed) should increase Fedwire's working hours to better accommodate the economy. The Fed has attempted to provide access to speedier payments through the FedNow initiative (a real-time settlement service), but the system has yet to become live. Worse, the Fed's ambition to enter the settlement market as both a regulator and a competitor has stymied private-sector developments in speedier payments. Expanding Fedwire's operation hours, on the other hand, is a quick and efficient way to enhance the pace of payments in the United States. In an ideal world, the Fed would abandon its FedNow program and reverse its decision to compete with the private sector on speedier payments.

In the United States, monetary policy has long been shrouded in obscurity. The Fed did not begin holding press briefings to present and explain the monetary policy choices made by the federal open market committee until 2011, nearly a century after it was founded. Despite this, the general populace remains mostly unaware. For example, under the Fed's new average inflation targeting regime, what should be a straightforward calculation that anybody can calculate is now anyone's guess because the Fed has yet to provide the time horizon or factors it employs to calculate the average. In fact, according to the Brookings Institution, half of Fed watchers say the central bank hasn't offered enough information about its plan.

Cryptocurrencies, such as Bitcoin, are frequently much more open about the laws that regulate their supply. Because of the popularity of open source code in the cryptocurrency world, nearly anyone may check the status of a certain cryptocurrency. Norbert Michel and Gerald Dwyer both point up that:

Congress should force the Fed to create an explicit monetary policy rule that outlines targets and the repercussions for failing to meet those aims in order to improve the openness of monetary policy governance in the United States. Because mistakes must be accounted for, average inflation targeting is a step in the right direction in theory. In practice, though, the new structure appears to have offered the Fed more leeway. Regardless of whether the current framework or a new one is used, Congress should impose an explicit rule that everybody can see and establish clear punishments for breaking it.

However, the early success of cryptocurrencies teaches us more than just how to improve financial privacy, payment speeds, and openness in monetary policy control. Goods and services that complement each other will emerge from a market that is free to compete and innovate. Stablecoins pegged to the dollar, for example, are an addition rather than a threat to the dollar's role as the world's reserve currency.

Many officials, in fact, have already realized that stablecoins can help the dollar. Randal Quarles, Federal Reserve Vice Chair for Supervision, remarked in a speech in 2021:

Reps. Blaine Luetkemeyer (R-MO), Andy Barr (R-KY), Ritchie Torres (D-NY), and John Rose (R-TN) have all made similar remarks. While some members continue to push for a crackdown on cryptocurrencies, a crackdown risks jeopardizing the dollar's newfound advantage. The issue that still exists is that cryptocurrencies operate inside an ambiguous legal framework, but this is a problem that Congress can address.

Legal tender regulations are frequently mistaken to indicate that anyone must accept, for example, the US dollar as payment anytime it is provided (this is referred to as "forced tender"). In reality, the dollar's legal tender status simply means that it can be used to pay taxes, fines, and contracts (unless another medium of exchange is agreed to in that contract). On its frequently asked questions page, the Fed explicitly addressed the ambiguity about legal tender, writing, "There is no federal statute mandating that a private business, a person, or an organization accept cash or coins as payment for products or services."

To avoid confusion between US legal tender rules and authoritarian regimes' forced tender laws, Congress should clarify the legal tender provisions in the US code. Section 5103 of the United States Code, for example, is titled "Legal Tender" and currently states,

Explicitly stating the limit of legal tender would make it clear that legal tender laws do not prohibit the use of alternative currencies. Such an amendment could take the form of adding the language already noted by the Fed such that the law reads,

Restrictions on private coinage are also in desperate need of explanation. Although the prospect of minting physical coins may seem remote in the context of cryptocurrencies, it was raised by Sen. Sherrod Brown (D-OH) at the end of 2021 when he asked Circle's Dante Disparte, "If you were a traditional finance company, [do you think] you could sell metal coins that say 'US dollar coin' on them?" And the US Department of Justice used this question in its case against the NORFED American Liberty Dollar, a privately issued money created by the now-defunct National Organization for the Repeal of the Federal Reserve Act and the Internal Revenue Code. Private coinage regulations are currently a dangerous steppingstone toward enacting a ban on digital currency.

The first step in reforming the statute should be to amend 18 U.S.C. Section 485. The law currently forbids coins that bear a "likeness or similitude" to U.S. coins, but it does not specify what level of resemblance is required for a coin to be designated an illegal counterfeit of an existing U.S. coin. To clarify the statute, Congress could add that a coin must include a combination of official phrases and imagery (such as United States of America, Liberty, In God We Trust, and E Pluribus Unum). To accommodate this adjustment, Congress would need to revise 18 U.S.C. Sections 487–491, but it would simply be a matter of amending the language for consistency.

Congress should also change 18 U.S.C. Section 486, which prohibits not only counterfeit coins but also coins with original designs. It could be as simple as removing the phrase "or of original design" from the record:

Capital gains taxes function as a deterrent to cryptocurrency adoption and should be eliminated, at the very least, where cryptocurrencies are used for transactions, while Congress should eventually modify capital gains rules to level the playing field for other alternative currencies as well. To begin with, capital gains tax rates are designed to encourage long-term ownership, which plainly discourages what is commonly referred to as "currency use." Second, the complexity of managing the tax adds to the burden for potential cryptocurrency users. Unlike sales taxes, which are typically a flat percentage applied to the bill, capital gains taxes require a bitcoin user to declare the sale price, cost, timing, and gain or loss for each transaction to the Internal Revenue Service. To determine the tax owing for each purchase of goods and services, users must record this information on Schedule D of Form 1040.

The capital gains tax should be abolished in transactions involving the purchase of goods and services with cryptocurrency. While not ideal, the Virtual Currency Tax Fairness Act of 2022 would exempt personal cryptocurrency transactions with gains of $200 or less from taxation. However, there are three major adjustments that may make the law better. The first would be to remove the $200 limit while maintaining the need that a cryptocurrency be used to buy goods and services (rather than to cash out). A second modification, at the very least, would be to significantly raise the threshold ($10,000 or more) so that larger transactions could be made without incurring additional taxation. Finally, a final alteration would be to adjust the inflation threshold.

Congress would be encouraging a free, open, and fair financial market that would promote the US dollar by repealing and revising obsolete rules that have impeded currency competition. The initial success of cryptocurrencies has already demonstrated that the American public wants stronger financial privacy protections, faster payments, and more openness in the control of monetary policy. If Congress takes the necessary actions to encourage currency competition, it will have the opportunity to not only make the dollar stronger today, but also to ensure its worldwide stature in the future.

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