Users and advocates of the cryptocurrency Bitcoin seem unlikely people to engage in policymaking. Bitcoin emerged in 2009 as a digital alternative to government-backed fiat currencies that bypasses banks and official regulators. Bitcoin’s open source software is readily downloaded, making it difficult for governments to constrain its use, even in jurisdictions where it is illegal. Nevertheless, government policymakers have wasted little time in seeking to exert some control over so-called cryptoassets and related transactions. But rather than going head-to-head with officials or finding new ways to circumvent them, growing numbers of cryptocurrency proponents are working to educate regulators on the nuances of Bitcoin as an internet-based currency.
The concept of currency unaffiliated with a government is less than intuitive. Most people feel comfortable with the trade-offs presented by the current central banking model; the US Federal Reserve has seigniorage privileges (the ability to profit from printing money), and in return the citizenry trusts that a stable unit of money will be maintained.
The creation of Bitcoin illustrates that trust in the prevailing model is fraying. Bitcoiners trust in code, math, and a distributed consensus model that allows anyone to participate rather than a single entity. Governing a currency no longer requires a top down approach, but this doesn’t obviate the need for businesses, exchanges, and policy-centric organizations to help assist in its adoption and ensure just rulemaking. The difference is that many of these cryptocurrency institutions are being built from the bottom up by individuals with skin in the game, rather than by governments.
This civil society of cryptocurrency advocates is a far cry from the turbulent tribes of Twitter, where the majority of crypto discussion takes place. These advocates are what economists Nils Karlson and Peter Haas would describe as an epistemic community. At the center of this community are policy organizations such as Coin Center and the Chamber of Digital Commerce, which are educating policymakers and informing discussions on such topics as money transmission licensing, tax policy, and financial privacy. The goal is to achieve common sense reform and establish a uniform taxonomy for evaluating digital assets. The work of these organizations shows how the multi-stakeholder model within Bitcoin creates “soft law,” defined as “arrangements that create substantive expectations that are not directly enforceable.” With these informed advocates, Bitcoiners now have public voices with real claims to relevant policy knowledge.
While the reform process requires a long time horizon, there are signs that policy engagement is on the rise. For instance, under current IRS guidelines that define Bitcoin as property, any consumer using digital currency to purchase goods and services would need to calculate and pay the capital gains or losses from their initial purchase of that currency, burdening those using Bitcoin as a medium of exchange. The recent introduction of the Virtual Currency Tax Fairness Act of 2020 aims to address this problem, proposing a tax exemption on transactions with gains up to $200. Should it pass, consumers will have a way to use cryptocurrencies without paying capital gains taxes for their daily cup of coffee.
The private sector also is responding in kind. For instance, the company Bakkt, whose previous CEO, Kelly Loeffler, is now the junior senator for Georgia, intends to roll out a consumer payments application for digital currency, touting Starbucks as its flagship partner. Even the financial sector, a historically skeptical critic of the cryptocurrency movement, seems to be turning the corner. Avanti Financial Group recently disclosed that it plans to start a US bank directly catering to the digital asset ecosystem.
Governance need not only come from formal government entities or private sector businesses, but can also arise from individuals and groups. In an impressive example of emergent order, the Bitcoin community has developed incredible tools and filters to govern itself absent regulatory certainty. Platforms like Coin Metrics and Messari deliver data and research to potential users and investors to help steer them from scams and provide transparency in an industry with a steep learning curve.
There is a cottage industry of good-faith content creators on platforms from Medium to YouTube that teach the basics of setting up a cryptocurrency wallet and getting started. Even the Bitcoin blockchain—a public record of transactions—and source code itself are transparent. Anyone can download and monitor the data flows generated by the network and personally validate things like the total amount of outstanding Bitcoin and the settlement of transactions. In many respects, individuals may have much more insight into how Bitcoin works than how a central bank like the US Federal Reserve operates.
Given this environment, policymakers focused on digital assets would do well to continue on the path of providing clarity rather than heavy-handed regulation. Bitcoin as a technology that enables user sovereignty and self-determination is a critical proving ground for our regulatory process. It is permissionless innovation personified—not asking for approval or consent to continue bringing economic freedom to the internet of money. At the same time, substantially regulating bitcoin would only punish those that might benefit from using it.
Commissioner Hester Peirce of the US Securities and Exchange Commission echoed similar sentiments in a February 6 speech, saying “It is important to write rules that well-intentioned people can follow. When we see people struggling to find a way both to comply with the law and accomplish their laudable objectives, we need to ask ourselves whether the law should change to enable them to pursue their efforts in confidence that they are doing so legally.”
Peirce followed with a proposal for the SEC to provide those building digital asset platforms with three years of flexibility to develop sufficiently decentralized networks. While such a safe harbor isn’t necessary for Bitcoin—which is not a security in the eyes of the SEC and hence not subject to the agency’s oversight and regulatory authority—this proposal would give the kind of assurance needed to foster domestic innovation and avoid the lack of regulatory clarity that has in the past pushed entrepreneurs abroad.
Wresting some control over one of the commanding heights of the economy—namely, the ability to create and issue money—and delivering it to the individual is no small task. The discussions over financial privacy, inclusion, and innovation are necessary in a world where many of the functions of daily life occur on the internet. As Tyler Cowen, professor of economics at George Mason University and chairman and faculty director of the Mercatus Center, points out “a blockchain is actually a form of governance, and that is what makes it such a potentially radical idea.”
Thankfully, the growing community of bitcoin advocates has the capacity to push for the kind of flexible regulatory environment that allows individuals to continue to innovate and offer an alternative to our traditional financial system.