Admittedly, the crypto space has a bit of the Gadsen Flag running through its veins:  “don’t tread on me” could easily be the motto for the entire space, but to assume that motto sums up the entire space, and sums up how it should be regulated, or how it should be viewed by politicians is incredibly short sighted. 

Over the past few years, as crypto has steadily crept into mainstream consciousness, it has been compared to the emergence of the Internet roughly 30 years ago.  The drop of Bitcoin from roughly $67,000 to $16,000 in 2022 has had many observers commenting on the dot com bust of the early 2000’s.  

While these types of comparisons are not unwarranted, as mental models of all types can help drive understanding of complicated concepts, I’ve begun to wonder if these comparisons are allowing regulators and politicians to completely miss what is at stake.  Gary Gensler’s latest attack on crypto, coming after US based exchange Kraken and hitting them with a $30M fine for its crypto staking program, is a perfect example of the type of thinking that could spell trouble for the United States down the road.

If crypto is to be compared to the Internet, then crypto is a tool.  If regulators shut it down, and it is simply a tool, then everyone has to essentially find another tool to do the job they were trying to accomplish.  

But what if crypto isn’t best compared to the Internet, what if it is best compared to the global capital market system of which, the US is the dominant player by a huge margin?  On the global stage, the dollar reigns supreme, and that dominance comes from many factors:  from a robust bond market to a centuries old rule of law system that has historically been the envy of the underdeveloped world.

What does it say though, when a company gets fined for doing something that only put money back in the hands of its customers?  Please understand, had Kraken simply acted as network “nodes” for the coins they offer on their exchange, and kept the profits to themselves, they wouldn’t have run afoul of the SEC.  So, profit sharing with customers is illegal, presumably based on a law that is nearly 100 years old? 

The SEC’s latest action doesn’t just scare away crypto companies from doing business in the United States, it scares away an entire financial market ecosystem.  Buying and holding crypto represents but a fraction of what is possible within this asset class, and US regulators and politicians imply by their actions that they are woefully negligent in their understanding of the space. 

At present, it appears that dollar backed stable coins represent their next target.  Ensuring the proper backing of these stable coins is critical, but attacking the concept behind stable coins is foolish, especially when one considers the fact that US backed stable coins equate to more demand for the US dollar, not less.  Nearly every crypto exchange in the world utilizes some sort of US dollar stablecoin in order to facilitate seamless trading.  Guess what you have to have initially to buy these stablecoins?  That’s right:  US dollars!  The benefits that we have accrued over the years due to the dollar system are on the verge of being forfeited, simply because our short sighted politicians and regulators can’t see that crypto is good for the dollar. 

Categories: Markets

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