One opening question for the new Biden Administration is how they might deal with cryptocurrencies. It’s not going to be an issue that is central to the administration directly, yet with the emergence of the digital yuan from geopolitical competitor China, and inflationary monetary policy meant to gear a recovery in employment rates, the questions on the economy, great power competition and digital rights around the world, central themes of bitcoin, will be immediate priorities.
A Biden Administration will have to weigh its policy tools and speeches carefully in an age of emerging “great power” conflict, protest movements around the world, and the economic stagnation that has come from the COVID-19 pandemic. The theme of bitcoin and cryptocurrencies is not just one of direct regulations and laws, but rather its outsize effect on international geopolitics, finance and political relations.
This article isn’t meant to be legal advice of any sort, but rather a walkthrough of the different issues, laws, and regulations an incoming Biden Administration may face with bitcoin and other cryptocurrencies.
The current state of bitcoin and federal policies
Currently, bitcoin is “directly” regulated at the federal level by the Office of the Comptroller of the Currency (OCC) with regards to its custody, and the US Commodity Futures Trading Commission (CFTC) under the Commodity Exchange Act (CEA).
There is an intersection with the IRS on tax policy, where transparency rules on disclosure and its classification as property means cryptocurrency holders have to pay federal capital gains tax.
Exchanges of cryptocurrencies and bitcoin may be subject to the Bank Secrecy Act and its registration/disclosure requirements. Cryptocurrencies and bitcoin are not insured by the Federal Deposit Insurance Corporation (FDIC).
Jay Clayton, the former chairman of the SEC affirmed that he determined that “bitcoin was not a security” so it did not fall under the SEC’s purview of regulation, unless people use crypto assets as securities to raise capital for a company or venture such as in the case of ICOs.
Biden nominees and advisors
A few Biden nominees and advisors have expressed opinions on bitcoin. They might be a reflection of his approach to decentralization and cryptocurrencies.
Perhaps the most important of these is Janet Yellen, Biden’s nominee to head the Treasury Department. She was the former chair of Economic Advisors during the Clinton Administration, and the chairwoman of the Federal Reserve System. She has said that “she will say outright that she is not a fan” of bitcoin, saying that many of the transactions that “do take place on bitcoin are illegal, illicit transactions.” She has speculated on the “very high” energy usage of bitcoin, as well as cybersecurity concerns around anonymous cryptocurrencies.
The Treasury Department contains the Office of the Comptroller of the Currency (OCC), and its leader is designated by the Secretary of the Treasury. The current holder of the office was the Chief Legal Officer of Coinbase, Brian Brooks, someone who had been seen as cryptocurrency-friendly, allowing for USD stablecoin reserves for banks. He will likely be replaced with somebody who is either apathetic to cryptocurrencies or maybe hostile to a certain degree.
The US Treasury Department’s Office of Foreign Asset Control can also add cryptocurrency addresses associated with sanctioned individuals to its blacklist. FinCEN is a bureau of the United States Department of the Treasury as well, one with immense powers to enforce against money laundering violations. It’s responsible for enforcing actions against bitcoin mixers and enforcing the Bank Secrecy Act.
Expect a Department of the Treasury headed by somebody inherently skeptical about the premise of anonymous or pseudonymous cryptocurrency to do more along the lines of these enforcement actions to target sanctioned cryptocurrency holders and to enforce actions against certain privacy tools in the bitcoin space with “serious and egregious” allegations of dealing with “darknet criminals”.
Another interesting Biden advisor with regards to bitcoin is Gary Gensler, who headed up the CFTC during the Obama Administration. He has been tapped to lead the transition team for financial policy for the incoming Biden Administration. Previously, he seemed skeptical of the conventional financial system, and has expressed pro-bitcoin sentiment before.
Throughout Biden’s team, the themes of boosting fiscal policy and monetary policy to solve unemployment, investor protection, breaking up tech monopolies and more resonate. These are all themes and variables that will interact with how a Biden Administration will work with bitcoin.
Yet, perhaps the most important variable is Joe Biden himself. Historically, he has been against encryption, introducing two bills with strong anti-encryption language while he was in the Senate. In fact, it was his two bills that inspired Hal Finney to work on PGP encryption — as well as perhaps, down the road, bitcoin itself.
Laws and regulations
Perhaps the most direct way the Biden Administration could affect bitcoin is through different laws and regulations. While a “ban” might be impossible to effectuate even if he wanted to (especially with what looks like a divided Congress), there are significant actions a Biden Administration can take. One avenue is Treasury-based enforcements that severely restrict or even ban self-custody of cryptocurrency.
This might severely dampen bitcoin’s price in the short-term, and cause a potential split between bitcoin stuck in the United States and the rest of the chain.
Some Democratic legistators are also looking to get stablecoins to comply with banking regulations. While the law in question has a slim chance of passing, it’s possible that Democratic legistators will see an opening with Democratic control of the executive to propose more bills that try to fit cryptocurrencies and bitcoin into the traditional financial system.
Both the taxation amounts on cryptocurrency and its treatment, as well as some of the implications of having pseudonymous or anonymous cryptocurrency payments on tax evasion, means the intersect between cryptocurrency and taxation weighs heavily on states who are seeking to maximize their tax collection.
The IRS during the Trump Administration has been relatively heavy-handed, exempting like-for-like trades from tax protections and classifying cryptocurrency as property (therefore requiring capital gains tax to be paid on it when there have been gains). A Biden administration is likely not to do worse, though it will be aligned towards increasing taxes and decreasing privacy, broadly speaking.
During the post-COVID period, with tax revenue potentially increasing to counteract an ever-growing national debt, there might be direct increases in taxation of cryptocurrencies through capital gains increases and an ever-more present assortment of taxes (including taxes on digital goods) where cryptocurrencies might be caught up.
More importantly, from a philosophical perspective, the state’s drive to maximize taxation will likely mean that it will look at central bank digital currencies and other tactics to try to deanonymize cryptocurrency flows with a central stated reason of fighting tax evasion.
China and Hong Kong
As the Pentagon reorients from “counter-terrorism” to “great power” conflict and sanctions and other back-and-forths emerge, the issue of China and Hong Kong and their relationship to the United States has a bitcoin dimension to it.
China is aggressively expanding DCEP, its version of a digital yuan, and looking to build alternatives to SWIFT for international wires. It is looking to position its new digital yuan, currently piloted in Chinese cities and airdropped in Shenzhen, as a domestic technological innovation that makes it resilient to international financial systems. Meanwhile, with the gradual dissolution of the “one country, two systems” framework in Hong Kong has come a spate of cryptocurrency regulations that make it impossible to sell bitcoin to “non-accredited investors”.
There’s also a long-term play to disrupt the USD’s position in international trade finance through combining China’s trade partnerships and new, more efficient digital standards for payments.
How the United States will respond to this trend will determine its position as either an incumbent that continues to ascend, or grows complacent and falls — and the Biden Administration will occupy a critical time window where this inflection point will come to pass.
Sanctions, human rights and international finance
Some portion of the states most inclined to use bitcoin are those cut off from the international financial system. It’s been rumored that North Korea supports bitcoin mining and also mines or asks for cryptocurrency in malware attacks. Venezuela and Iran both have seized bitcoin miners. The common denominator among these states is that they are regarded as “rogue states” in the US-led financial world order.
Iran is trying hard to position a continuation of the deal it got under the Obama Administration with Joe Biden — it’s unclear what will happen to other states such as Venezuela and North Korea with a more traditional and institutionalist foreign policy.
Yet it’s not just rogue states, and ones that are repressive that are using bitcoin and cryptocurrencies. Dissidents are using the property of bitcoin’s censorship resistance, to among other things, fund anti-police brutality protests in Nigeria and support dissent from state employees in Belarus. Individual protesters around the world are soliciting funds in bitcoin.
A balanced approach to human rights and bitcoin will consider this developing consequence of economic liberty and privacy, much as Tor is used to help dissidents connect to freer and more private versions of the Internet.
Yet as the Biden Administration deals with the interplay between these different “rogue nations” and the dissidents other more established states may repress, one thing is clear: the element of bitcoin will be a part of these discussions.
While it can be easy to paint bitcoin and cryptocurrency as being bearish or bullish from a very broad thesis from the emergence of Biden’s administration (either the economy will crash under excessive fiscal and monetary stimulus and be bullish for bitcoin or Biden will unilaterally ban bitcoin somehow and it will be…bearish.), the easier case to make is not the existential House Divided theme of “either this or that” but rather a Hegelian synthesis of ideas.
The greater testament to bitcoin’s growth is not the immediate price movements that will precede or stem from Biden Administration actions. It is that within its themes of individual liberty, financial privacy, easy cross-border payments and empowering meaningful dissent, it has grown to the degree where it will be interweaved with many of the central policy discussions an incoming Biden Administration will have to engage.