Cryptocurrency has wandered in a regulatory wilderness ever since emerging from the 2009 recession as a form of electronic cash, a digital system of payment that didn’t have to flow through a financial institution with big government looking over your shoulder.
For more than a decade there has been little direction from federal regulators, if not outright hostility, for the burgeoning financial system.
Now, President-elect Donald Trump wants to bring bitcoin and its brethren in from the cold. His warm embrace includes a crypto-friendly chairman of the Securities and Exchange Commission and the appointment of a special “czar” for crypto and artificial intelligence.
Most notably, the incoming administration wants to write regulations that guide how bitcoin and potentially other forms of cryptocurrency should be classified by regulators and managed by banks. It’s a pivot from the heavy-handed approach of the Biden administration, which sued crypto operations for facilitating the trade of unregistered securities or warned banks and investors to be cautious about crypto assets.
“The problem during the Biden administration is that there was a lack of clarity about what is considered a commodity, what is considered a security, or whether cryptocurrencies and tokens need their own separate definitions and regulatory rules and enforcement,” said Joshua Hendrickson, an associate professor of economics at the University of Mississippi. “The Biden administration provided no such clarity and, in fact, the SEC effectively sought to make policy through enforcement.”
Bitcoin is a digital investment that allows users to log transactions on peer-to-peer networks instead of using a financial institution. Transactions are recorded on what’s known as a blockchain.
The idea behind bitcoin was to create a kind of electronic version of cash that could be traded from person to person — with only the parties involved knowing the transaction took place.
“In terms of spending bitcoin, it is quite easy to send and receive bitcoin using software that one can put on their phone or laptop,” Mr. Hendrickson said. “It is not all that different from using something like Apple Pay. The only difference is that it is still much harder to find people willing to accept bitcoin as payment than it is to use Apple Pay.”
For many people, bitcoin is just something you can own, like gold, and hold onto as protection against inflation. Other crypto assets are used to buy and trade things of value — such as Helium crypto for mobile phone or wifi data — and there are stablecoins, which are designed to maintain a fixed value over time and are redeemable for things like U.S. dollars.
Cryptocurrency is often seen as experimental. It has gone through boom-and-bust cycles since its creation.
Still, supporters see Mr. Trump’s vocal support as validation.
“Bitcoin and other cryptocurrencies have faced regulatory obstacles under the existing administration,” said William Luther, an associate professor of economics at Florida Atlantic University. “The incoming administration will likely take a more permissive regulatory approach.”
Mr. Trump’s embrace of crypto is a personal about-face. He criticized the currency in 2019, calling its value “highly volatile and based on thin air.”
This year, Mr. Trump campaigned as a crypto champion, spoke at a Bitcoin conference and accepted crypto-based campaign donations. He says he doesn’t want China or other nations to embrace crypto and get ahead of the U.S.
“We’re going to do something great with crypto,” Mr. Trump told CNBC after ringing the opening bell at the New York Stock Exchange earlier this month. “Others are embracing it, and we want to be the head.”
His son, Eric Trump, recently told a crypto conference in Abu Dhabi that his family embraced crypto after traditional banks froze out the Trumps following the attack on the Capitol on Jan. 6, 2021.
Mr. Trump and his family have their own crypto project, World Liberty Financial, unveiled in September. The effort received $30 million from entrepreneur Justin Sun, Bloomberg reported last month.
Capitol Hill lawmakers also say there is an appetite to create a statutory framework for digital assets. For years, politicians feared crypto was only good for drug trafficking and other illicit activity, or they had no desire to grapple with money outside of the government’s reach.
The price of bitcoin —- a prominent form of cryptocurrency — hit $100,000 a few weeks after Mr. Trump’s victory. It was a huge milestone that reflected increased demand for bitcoin and warmer political attitudes from the incoming White House team.
The surge in price coincided with Mr. Trump’s decision to select Paul Atkins, viewed as crypto-friendly, to replace current SEC Chairman Gary Gensler.
“We can no longer afford an SEC that stifles innovation and promotes hostility towards innovations like crypto. Paul will help return the SEC to its role as a common-sense regulator that provides a clear, straightforward regulatory framework to make capital markets great again,” said Derrick Morgan, executive vice president at the conservative Heritage Foundation.
Mr. Trump named David O. Sacks as his crypto and artificial intelligence czar. He is a member of the so-called “Pay Pal mafia,” a group that worked at the digital payment company and includes Trump supporters such as Elon Musk and Peter Thiel.
“David Sacks is an extremely successful entrepreneur and investor who will guide policy for the second administration in artificial intelligence and cryptocurrency, crucial to the future of American competitiveness,” said Brian Hughes, a Trump-Vance transition spokesman. “Under President Trump’s leadership, David will safeguard free speech online, and steer us away from big tech bias and censorship, and develop a legal framework so the crypto industry can thrive in the United States.”
The incoming administration will need to determine if banks should be allowed to hold bitcoins for customers and settle the key question of whether cryptocurrencies and tokens are considered securities — a designation that refers to financial assets that can be traded or sold in the financial market. Securities include things like stocks, bonds and investment contracts.
“That [question] is one that the SEC has just been refusing to create an actual rule about, partly so that they could do this regulation-through-enforcement and just bully a lot of these companies,” said Thomas Hogan, a senior research fellow at the Bitcoin Policy Institute and an associate professor of economics at the University of Austin. “Crypto companies right now are waiting to find out what the law around this is going to be so they can issue tokens, and then also regular financial companies are worried about it because they don’t want to own crypto tokens until they get some clarity under the law.”
Mr. Trump’s embrace of crypto reflects wider acceptance by investors. BlackRock, the global investment company, recently recommended that investors make bitcoin up to 2% of their portfolios.
“Modern portfolio theory suggests that investors will do well with a diversified portfolio that mimics the market,” Mr. Luther said. “Since the market capitalization of bitcoin is around 1.5% of the market capitalization of global equities, a 0% to 2% bitcoin allocation is probably a reasonable range for most investors.”
Mr. Trump also wants to create a strategic national stockpile of bitcoin.
Sen. Cynthia Lummis, Wyoming Republican, said the U.S. has reserves, including gold certificates, that could be converted to fair-market value and sold to acquire bitcoin. Her BITCOIN Act would implement a plan to acquire a stake of about 5% of the total bitcoin supply, mirroring the size and scope of gold reserves held by the U.S.
“This is our Louisiana Purchase moment that will help us reach the next financial frontier,” the senator said in a news release.
Not everyone is sold on the idea, saying it would be useless at best or destabilize the dollar at worst.
Larry Summers, who ran the Treasury under President Bill Clinton, says the idea of a national Bitcoin reserve “is crazy” and would amount to “sterile inventory.”
“There’s no reason to do that other than to pander to generous special interest campaign contributors,” he told Bloomberg TV.
Peter Schiff, the chief economist at Euro Pacific Funds, warned the government might have to keep buying bitcoin to “maintain the pretense that its Bitcoin reserve has actual value,” setting off a chain reaction that hurts the dollar.
“Bitcoin prices would keep rising, and the U.S. government would have to print even more money to buy more bitcoin,” he wrote in a November post on X. “Ultimately, so many dollars would be printed to buy bitcoin that the U.S. would experience hyperinflation, rendering the dollar completely worthless.”
Yet for true believers, there is no going back.
“The people in the crypto industry are frustrated that no one’s ever put together a sensible plan as to how to regulate an industry. They’re fine with regulation, but they just want guidelines, and they’ve said that,” Eric Trump told CNBC from Abu Dhabi. “We will have a clear road map, and hopefully, the rest of the world follows that.”
• Tom Howell Jr. can be reached at thowell@washingtontimes.com.