China recently announced a major crackdown on cryptocurrency. The relative ease of use of existing currencies such as Bitcoin and Ethereum and their transparent operating code is apparently too much for the People’s Republic to allow its citizens to use. The development mirrors an apparent, but not as well-defined, push by Biden administration officials and members of the media to sink, or at least control, the crypto market. With recent public attention on the role of cryptocurrencies, there is a unique window for Washington to shape or strangle the rise of what it increasingly sees as a competitor and threat to its system of fiat currency.
The federal response shows a veneer of ostensible reasons for the government crackdown. At the start of the most recent crypto boom, Treasury Secretary Janet Yellen sounded the alarm about Bitcoin being “inefficient.” Rumors about the Securities and Exchange Commission investigating Tesla magnate Elon Musk’s Dogecoin tweets were so persistent that Musk himself commented, saying such an investigation would be “awesome.” After all, as the Washington Post put it, crypto has an “Elon Musk problem.” The ability for investors or tech giants to utilize cryptocurrencies will be a lucrative opening for the government either to coerce their cooperation or to simply seize control. And if it cannot be controlled, it can be taxed.
Paralleling Ronald Reagan’s old quip — “If it moves, tax it” — lawmakers may have steep new crypto taxes in mind. One of the most persistent predictions of the past month is a potentially massive surcharge on any alternative currency gains. One rumor is that Yellen wants an 80 percent crypto tax. Even without such a new burden, President Biden’s proposed tax changes will heavily impact online traders: Short-term holders of currencies such as Bitcoin may see their effective tax rate surge from 10 percent to 37 percent. Just this week, the Biden administration announced new regulations forcing taxpayers to report major crypto gains. As the White House put it, cryptocurrency “poses a significant detection problem by facilitating illegal activity broadly including tax evasion.”
Meanwhile, the media are pushing a full-court press against the rise of crypto. Any number of recent news pieces shape a narrative that mining the coins is bad for the environment. However, in many ways crypto mining and distribution is far more efficient proportional to traditional finance. The recent increase in interest also sparked a wide-scale microchip shortage. Beyond the environmental and market constraints, media hype paints crypto as a tech gateway to several societal problems. Heck, one trope is that the free nature of crypto may not liberalize markets at all — but instead may be a Trojan horse for authoritarianism.
The New York Times pushed the idea that crypto is ultimately a safe haven for criminals; at least 13 percent of all crypto transactions happen in privacy wallets. Nothing would make regulators frustrated like currency transfers outside of the view and control of the federal government. It certainly doesn’t help that the proprietors of the Colonial Pipeline allegedly paid a $4.4 million ransom to hackers using Bitcoin. How long will it be until Greta Thunberg graces Stalinesque billboards, frowning and lecturing motorists that mining or holding crypto is killing the planet?
All of these moves are happening during a steep decline in crypto prices across the board. If there were ever an opening for government overreach, it would be now before crypto could pose an existential threat to fiat money. Regulators could argue that the massive price swings and use in criminal enterprises overshadow the leveling effect that cryptocurrencies have on the wider market. I have written about how Washington or the Federal Reserve may push its own superseding “FedCoin” concept and use it to effectively gut the existing crypto Wild West. All of these potentials tap into the worst impulses of D.C. and the Fed: they enact policies that weaken the U.S. dollar and restrict the ability for citizens to preserve wealth during inflationary periods. Ultimately, any set of laws or regulations would effectuate government control of global transactions.
What does this mean for the average crypto investor or dabbler? Perhaps not much in the short term. You might check your Robinhood account to see the daily price changes and not think much of the overall picture. However, the overarching effect is like a ratchet — government only takes more control and never moves in the other direction. A unique mixture of regulation, media frenzy and taxation could neuter the entire concept of a decentralized, free market system that Bitcoin, Ethereum, Dogecoin, et. al. represent. When that day occurs, the ability for free citizens to hold value outside of a rapidly-inflating U.S. dollar disintegrates. Just as China fears the possibility that its citizens are able to get a taste of economic freedom, ours soon may be closing.
Kristin Tate is a libertarian writer and an analyst for Young Americans for Liberty. She is an author whose latest book is “How Do I Tax Thee? A Field Guide to the Great American Rip-Off.” Follow her on Twitter @KristinBTate.