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When observing policymaking in Washington, it is important to bear in mind that governments, being comprised of individuals, are subject to the complexities of human nature. Emotions can often hinder their ability to make rational decisions.
In my previous warning last week, I expressed my concern about a worrisome trend of politicization in U.S. crypto policy, which was evidenced by a series of regulatory enforcement actions against the industry. While I still hold that view, my perspective has become more nuanced thanks to the insights of two well-connected individuals in Washington D.C. They shed light on the significant influence of emotions, particularly anger and embarrassment, in shaping these policy actions.
This experience served as a reminder of the crucial significance of well-defined and immutable governance rules, whether they are enshrined within democratic institutions such as the U.S. Constitution, or incorporated into consensus mechanisms employed by open-source software communities, such as those underpinning blockchain protocols.
Regulation-by-retribution
Over the past five months, there have been several instances where Sam Bankman-Fried was blamed for the crackdown against Kraken, Coinbase, Paxos, Binance, and other crypto companies. However, the most significant one was his role as the founder of FTX, which collapsed rapidly in November and sent shockwaves through the entire industry. This has led to a series of "Thanks Sam" moments, as many believe that the crackdown was driven by a desire to punish him.
This is how one of my sources characterized the attitude of Biden administration officials and lawmakers from both sides of the political spectrum: "You can't just come into their house, throw around that kind of money, embarrass politicians, and not expect to face serious consequences." He was alluding to the fact that prior to the FTX scandal, politicians - mostly Democrats, but also some Republicans - had received more than $74 million in political donations from FTX and had established ties with Bankman-Fried, who had courted progressives with his "effective altruism" commitments.
Almost nobody in the industry would downplay Bankman-Fried's substantial misconduct, and many now advocate for stricter regulation. (In fact, the primary source of frustration is that SBF's actions have hindered the possibility of a coherent regulatory framework, leaving agencies like the Securities and Exchange Commission to operate with unchecked power.) What is particularly infuriating is the arbitrary and vastly disproportionate response that was triggered by that wrongdoing.
Regulation-by-enforcement is now a thing of the past; it appears we have stepped into a new era of regulation-by-retribution, which is quite absurd.
Putting aside the fact that millions of investors, employees, and developers who have a stake in the crypto industry are now being punished for the misdeeds of a few fraudsters they had no knowledge of or involvement in, the larger concern is that the United States is on the brink of losing its ability to shape the trajectory of this inherently borderless technology. Since there are few physical or geographical barriers to prevent blockchain developers from favoring one country over another, the hostile stance that the U.S. is taking toward this industry sets it apart from other developed economies.
There is a growing belief that digital assets and blockchain innovation, which have become even more crucial in the era of artificial intelligence, will move away from the United States to countries with more favorable regulatory environments. Moreover, there is a particularly counterproductive notion that by attempting to keep this technology away from malicious actors in rogue nations, the U.S. is actually increasing the likelihood of such technology being utilized by them.
The positive aspect is that this vindictive phase is expected to fade away, as with most emotionally charged overreactions. Eventually, emotions will give way to a more mature and pragmatic policy approach. Nevertheless, the harm already inflicted on the United States' ability to attract cryptocurrency investment, entrepreneurship, and innovation may be significant. Leaders from various industries in the U.S. have cautioned against the potential departure of crypto businesses.
Whether it is perceived as a "war against crypto" or a deliberate act of intimidation, the recent wave of criminal and civil charges is being interpreted by crypto industry professionals as a warning that it has become too risky to continue operating in the United States without clear legislative guidance defining permissible activities. As a result, many are now considering leaving the U.S. altogether.
The message was conveyed through two significant developments. Firstly, the regulatory actions appeared to be too well-coordinated to be coincidental. Secondly, the White House issued a scathing report on the crypto industry at the same time, reversing the open-minded executive order it had issued a year earlier. Senator Elizabeth Warren (D-Mass.), a prominent figure of the Democratic Party's progressive wing, further added to the negativity by launching a political campaign that embraced a Politico headline proclaiming her formation of an "anti-crypto army".
Who’s governing the governors?
“D.C. is Veep. It’s not House of Cards.”
This statement was made by my co-host on Money Reimagined, Sheila Warren, who is also the CEO of the Crypto Council for Innovation and one of the sources for this story (the other source will remain anonymous). She made this comment during the recording of this week's podcast.
It is reassuring to realize that we are not entirely subject to the manipulations of a cynical master plan concocted by individuals like Frank Underwood, the political antagonist portrayed by Kevin Spacey in House of Cards.
However, it is disheartening to acknowledge that the inherent imperfections of human beings render our governing systems susceptible to moments of absurdity such as these, almost as if we are forever subject to the self-centered decision-making of individuals like Vice President Selina Meyer, the comically flawed protagonist portrayed by Julia Louis-Dreyfus in Veep.
The occurrence of these human shortcomings, whether malevolent or ridiculous, prompted the French philosopher Montesquieu to formulate the "separation of powers" doctrine, a governing principle created to safeguard the interests of society from the errors or misconduct of its leaders. These concepts were subsequently incorporated into the U.S. Constitution and influenced the development of the Westminster System, which features three distinct and autonomous branches of government.
These principles also underpin the concept of blockchain, as outlined in the original Bitcoin whitepaper, which posits the need for a system to manage currency, assets, and information without reliance on "trusted third party" intermediaries. The requirement to place trust in these middlemen and their representatives will always leave us susceptible to the fact that they are controlled by fallible humans, rather than the impartiality of mathematics.
While I am not a fervent proponent of supplanting the nation-state with a digital "network state," it is intriguing to contemplate how emerging technologies provide individuals with the choice to opt into decentralized economic systems and how this could indirectly compel our politicians to improve their performance.
The current "war on crypto" is alarming as it places the United States and its market democracy model in greater jeopardy of forfeiting economic and technological dominance. Nevertheless, we can find solace in the possibility that the technology itself could apply a self-regulating pressure on the political system to prevent the most detrimental consequences.
Source Coindesk
