Will the US Become Crypto Friendly?

Commentary

The horseshoe is one of history’s great inventions. When the iron version came along in the 5th or 6th century, it doubled the power and endurance of the horse for use in farming, transportation, and in warfare.

It was a glorious thing to behold, how a small invention could so dramatically improve on nature. No one knows who came up with the idea, for there was no patent and no registration. It emerged from an experiment that was then emulated by many people. By the late Middle Ages, all horses in daily use had iron shoes.

I’m telling this story in order to engage in a mental experiment. What if the local prince or baron decided that they were bad and banned them in his realm? Maybe he did this because he figured that too much agricultural production could destabilize existing workflows and tempt the peasants into fleeing for greener pastures. Maybe he was just an extreme conservative who looked skeptically at all innovation.

The question: Do you think that a ban on horseshoes would have lasted? Maybe it could work for a while in one small area but surely not over the long term. An idea like this one has a longer life than any one regime and a bigger geographic reach than any jurisdiction can contain for the long term. The ubiquity of the horseshoe was inevitable. That’s true for most inventions of this sort—among them blockchain technology itself.

This is what came to mind after my first experience with Bitcoin. Here we have an information packet that is limited in supply and non-reproducible due to the manner in which its existence is recorded on a public ledger. The creation rate is governed by a strict protocol that is powered by algorithms that process changes in ownership titles. It can be exchanged peer-to-peer in ways that transcend geographic contiguity.

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Nothing like this has ever existed. It works not only as a form of money but it contains within the system a method of settling accounts: a medium of exchange and mediation services all built into the same ledger.

Once I put together the operation of it (doing so required that I hit the books and learn about double-key cryptography, file sharing methods, and public ledgers, adding to my existing knowledge of monetary systems), I quickly realized that this technology could change the world. It would affect monetary systems, finance, contracts, and systems of recording title ownership. It was as significant as the invention of the database times ten thousand.

In other words, the invention of this tool was as important as flight, electricity, telephony, and the horseshoe itself. Like all those ideas, the technology belonged ultimately to everyone and would thus spread and become a change agent no matter what governments attempted to do to suppress it.

This thought was important but I intuited in early 2013 what was coming. Governments would attempt to regulate it like a security or a new money on the scene, beating it to pieces to try to get it to behave like something that already existed. This very thing happened later that year. It came in the form of a memo from the U.S. Treasury Department. Anyone converting dollars to Bitcoin and back again had to register in all 50 states as a money exchange, same as any company converting Yen or Euro to U.S. Dollars and back again.

This memo was sent even as a huge cottage industry of crypto exchanges had popped up all over the country, including websites connecting all sorts of regular people who were excited about how all of this would work. Within days and weeks of the new regulation, the defiance of which imposed criminal penalties, thousands or tens of thousands of startup exchanges were destroyed. Government intervention crushed a budding industry in its infancy.

As a result, only a few institutions in the United States could leap through all the necessary regulatory hurdles and afford the expense of filing and maintaining 50 separate state-level registrations. That immediately created a cartel of sorts, of Bitcoin exchanges, thus limiting competition and centralizing financial power, just as exists in the dollar-based world. The on-ramps and off-ramps were now completely controlled by government.

That was just the start of the intervention. The use of taxation came next, as gains in this realm were treated the same as gains from the financial market and taxed. This created the conditions that limited their use and disincentivized deploying any crypto token as a form of money as an alternative to government fiat. The freezing of Bitcoin’s scalability with the limits on block size drove up fees and slowed down settlement. By 2017, it was a done deal.

To return to the earlier historical metaphor, the prince has effectively throttled the use of the horseshoe. To be sure, there is no question that this approach is doomed to fail in the long run. We see many governments around the world now rejecting this high regulation. They are courting the whole industry and rolling out the red carpet for the owners and entrepreneurs in Bitcoin, along with the entire industry dedicated to using tokenization as a means of capital campaigns and portfolio management.

The United States would eventually come around, of course, but not without many victims along the way. The United States has spent years prosecuting people for entrepreneurship in this sector. Many people are still in jail or otherwise dealing with lawfare designed to throttle enterprise. Many of them are my friends from the old days, and it is a true tragedy.