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Crypto Currents

Crypto Fans Think the Government is Out to Get Them. They’re Not Wrong.

Digital currency enthusiasts can scream all they want about the Biden administration conspiring against them, but they brought this on themselves.

Tom Williams/Getty Images
Sam Bankman-Fried, the disgraced founder and CEO of crypto firm FTX, testifies virtually during a House Financial Services Committee hearing.

Some of the purest politics around—true struggles over competing interests, limited resources, and ideological worldviews—can be found in the world of crypto. But it’s only pure in the sense of potency, not morality: The collapse of Sam Bankman-Fried’s fraudulent crypto empire revealed a vast political influence operation that has led to multiple indictments, with more likely on the way.

Corruption is a feature of politics, if not a welcome one, especially when there’s a lot of money at stake. And in crypto we see opposing sidesessentially, industry and its political proxies versus some consumer-minded Democrats and activist groupsbattling it out with little hope of compromise. But with the Biden administration now taking a more active interest in regulating the industry, crypto fans are carping about a conspiracy bent on taking the industry down. In this regard, they’re not entirely off-base. But if they want to catch sight of the culprit, they need to look in the mirror.

The latest initiative to raise the crypto industry’s hackles is the Digital Asset Mining Energy, or DAME, tax, which the White House introduced last week. The proposed excise tax calls for crypto minersthe companies running vast data centers of specialized electronic “mining” equipment that helps validate and secure crypto transactionsto pay a 30 percent tax on the electricity they consume. Crypto mining, especially the “proof of work” method that bitcoin uses, is notoriously energy intensive. As noted in a thread by the White House’s Council of Economic Advisers, crypto mining “is estimated to use more energy than all computers in the United States,” has revived once-dormant fossil fuel power plants, and raises energy and infrastructure costs for local communities in which it operates.

The DAME proposal is essentially a tax on the negative externalities caused by an industry for which many people struggle to see legitimate value or use cases. As the White House wrote, “Currently, crypto mining firms do not have to pay for the full cost they impose on others, in the form of local environmental pollution, higher energy prices, and the impacts of increased greenhouse gas emissions on the climate. The DAME tax encourages firms to start taking better account of the harms they impose on society.”

It’s a call for social and economic responsibility that could not be more anathema to libertarian-minded coiners who just want the government to get out of the way so that they can continue with the important business of innovating the future of money and economically liberating themselves from the shackles of the Federal Reserve.

The response from crypto-land ranged, unsurprisingly, from surprise to anger to bafflement. Many people in crypto simply don’t see the industry’s energy consumption as a problem; others cling to the belief that the media has vastly distorted the issue.

“Apparently it doesn’t matter where the electricity comes fromcoal, gas, 100% renewable, etc,” tweeted Brian Quintez, a former CFTC commissioner who’s now head of crypto policy at Andreessen Horowitz, a venture capital firm with billions in crypto investments. “If the government doesn’t like how you USE the energy, you’ll be penalized.” Anthony Scaramucci, the briefly tenured White House comms director who took an investment from Sam Bankman-Fried and is now starting a new crypto business with one of SBF’s former lieutenants, was equally dismissive: “Maybe the White House should focus on the debt ceiling and the banking crisisrather than crypto bills that will never pass the House.” One industry lawyer even suggested that the tax violated the First Amendment.

In recent months, crypto influencers, executives, and media personalities have begun talking about what they call “Operation Choke Point 2.0,” a reference to a 2013 Department of Justice operation that targeted businesses such as payday lenders and online gambling companies, which were considered to be prone to money laundering and other forms of illicit finance. Supporters considered it a way to clean up some of the dregs of the financial system and prevent the proliferation of scams and fraud. Critics argued that it ensnared legitimate businesses and put too much scrutiny on the banking habits of everyday consumers.

Now Operation Choke Point 2.0which, to be clear, exists only in the minds of crypto cultistsis aiming to do something similar, cutting off banking access to crypto companies and drowning them in taxes and regulations. The DAME tax is supposed to be the latest such injustice. Another example is the recent government takeover of Signature Bank, a bank with a significant crypto business that was seized by regulatorsprematurely, some believe.

The New York Department of Financial Services claimed, however, that the takeover of the bank had little to do with its crypto business and more to do with its shaky balance sheet. That hasn’t stopped crypto partisans from claiming they were deliberately targeted, even victimized. Barney Frank, the avuncular former congressman whose name was once synonymous with banking regulation and who now works for Signature, told Bloomberg that the government was trying to discourage people from using crypto. “We were singled out to be the poster child for that message,” he said.

Frank is wrong on the details. There is not a government conspiracy to quash crypto. But he and his fellow paid-up crypto supporters are broadly correct that the Biden administration seems to see crypto as a problem to be contained, if not solved. Since taking power, the administration has called for government agencies to develop crypto policies; issued an executive order about the “responsible development of digital assets”; set up investigatory units at the Justice Department and the FBI; and applied the law to charge Ponzi scheme operators, insider traders, wire fraudsters, and other crypto-related criminals. The Federal Reserve, which operates independently from the White House, has also issued statements warning about banking risks involving crypto assetsthe sort of risks that led to the collapse of Silvergate Bank, which until recently serviced the industry.

But what’s happening here is not an anti-crypto conspiracy: It’s basic governance, with a number of agencies and institutions taking a hard look at an industry that has routinely caused economic calamity for many ordinary people. That narrative—which preaches caution and faith in the fairness of the administrative state—holds no purchase in the crypto industry. There is a recurrent sense among crypto’s true believers, especially in the wake of the FTX collapse and the ongoing, so-called “crypto winter,” that people in power just don’t get it, man. Crypto’s inevitability, its inherent superiority, is to their minds assured. (For the truly converted, this means only bitcoin, which they consider to be categorically different from all other crypto tokens.)

Some people in power can be brought onboardconverted by campaign donations or the noisy ministrations of crypto investors who consider themselves single-issue voters. But by and large, the prevailing coiner attitude is that the government needs to stand back and let the industry innovate and spread decentralized economic prosperity.

Fallen crypto titan Sam Bankman-Fried was quite public with his political influence efforts, flooding Congress with donations, pressing the flesh, testifying before committees, and hiring former government officials. Other crypto companies like Ripplewhich is engaged in a significant lawsuit with the SECare happy to post executives’ selfies with regulators on social media and tour the events circuit that places government officials on panels with their former colleagues who exchanged public service for far more lucrative lobbying jobs.

But this is theater. A defining feature of crypto has always been its supposed ability to exist outside of government, to separate money from the state and all of the other controlling institutions, regulations, and laws that might entail. That is the point. When Bankman-Fried went down, many of his industry critics broke their self-imposed silence and denounced his efforts to cooperate with (and potentially corrupt) government officials. Crypto was not supposed to be about working within the existing political economy; it was about transcending it. Bankman-Fried’s grubby influence operation seemed beneath the ultralibertarian concerns of people who wanted to be free of government entirely.

For the last couple of years, the crypto industry has repeatedly asked for “regulatory clarity,” claiming that entities like the Securities and Exchange Commission were creating policy through arbitrary enforcement actions. For crypto’s critics, the state of play was far different: Crypto did have regulatory clarityexisting securities and banking regulations were sufficient to encompass even a novel technology like blockchainbut the industry ignored laws, operated recklessly, and blamed politicians for its mistakes. Some crypto boosters attributed the FTX collapse not to the allegedly criminal actions of Bankman-Fried and his cohort but rather to the Biden administration and SEC Chairman Gary Gensler. In their telling, it was Gensler’s fault for not investigating FTX earlier, but it was also the administration’s fault for not providing regulatory clarity, which caused companies like FTX to set up shop offshorewhere they could not be properly investigated by agencies like the SEC.

It did not seem to matter that FTX, like others before them, may have set up operations overseas because that made it easier to do crimes. Jurisdictional arbitrage has become a fundamental feature of tech-minded disruptors who bounce between states or countries, hoping to find the right combination of free-market idealism and political intransigence that allows them to capture markets and write new rules of the road for themselves. It’s not always about deliberately breaking the law, merely sidestepping it. It’s been called “the Uber model,” and it’s been even more cravenly applied by crypto companies. Bankman-Fried, for instance, was based at various times in Berkeley, Hong Kong, and the Caribbean, borne aloft by the prevailing legal and financial winds. He had 130 or more shell companies under various names all over the world.

Whether it’s stopping scams or checking its energy usage, the crypto industry has abdicated responsibility for what its products and technologies do. In typical start-up fashion, crypto’s loudest boosters exhibit little introspection or humility (SBF was known for his dislike of reading books). They expect the rest of us to catch up, to get on board with their utopian vision for economic revolution.

That obviously hasn’t happened, and the industry has only itself to blame for its failures. Since digital asset prices peaked in November 2021, the crypto industry has contracted by almost two-thirds, numerous companies have gone bankrupt, some executives have been charged with financial crimes while others fled to friendlier jurisdictions, and millions of everyday customers have lost their moneyreal money. If crypto has failed to achieve escape velocity, it’s been held back by these factors and by the simple fact that most people don’t see a use case for it and consider it (not unreasonably!) to be untrustworthy and dominated by unscrupulous operators. None of these underlying factors can be fixed by some perfect, industry-friendly regulatory environment.

The other lesson here is that the crypto industry simply will not accept the regulatory and legal terms offered by Democrats and the Biden administration. With the collapse in crypto prices, many miners have found themselves deeply in debt. Some held onto their tokens during boom times, taking on loans to cover electricity and equipment costs, and now they are underwater. Several major mining firms have filed for bankruptcy or been taken over by rivals. A 30 percent tax could sink a business that is already on life support. Industry won’t even entertain the idea.

That’s what makes crypto an important political battleground. It’s about competing political visions that may not be reconcilable. And right now, crypto is losing. The shame of it all is that it’s largely a battle between two unsympathetic sidesa sclerotic administrative state friendly to Wall Street versus a band of semi-lawless disruptors focused on enriching themselves. Crypto’s critiques of the financial system are sometimes worth heeding, but its solutions magnify financial capitalism’s worst sins. The ultimate failure will rest on the Biden administration if it can’t offer a new way to reform a vastly unequal, and unfree, economy.