Cryptocurrencies like Bitcoin and Ether have made their way into the mainstream and unsurprisingly gained the attention of authorities and policymakers, so what does the government think of cryptocurrencies? What do the SEC, CFTC, and IRS think about cryptocurrencies? Each agency views cryptocurrencies like Bitcoin in a different light so there isn’t a uniform verdict.
If we want a feel, however, for what Congress thinks about cryptocurrencies, we can dive into the Joint Economic Report, an annual report produced by the Joint Economic Committee (drawing members from the House and Senate both).
The report was released just a month ago on March 13 and while comprehensive, contains a section assessing the rise of cryptocurrencies and the underlying blockchain technology. The report is meant to
“assist the several Committees of Congress and its Members as they deal with economic issues and legislation pertaining thereto.”
So let’s take a look at the “cryptocurrency” section of the document. The section is titled, Building a Secure Future, One Blockchain at a Time.
After providing an overview of Bitcoin, Ethereum, and Litecoin’s performance in 2017 compared to the Dow Jones, the report delves into the question, “Are Digital Currencies Actual Currencies?”
Is Bitcoin a Currency?
The foremost digital currency which comes to mind would likely be Bitcoin. Economists across the country, however, question the validity of digital currencies like Bitcoin when considering the few ubiquitous functions of a currency.
“Currencies serve three functions: medium of exchange, unit of account, and store of value. A medium of exchange is something people willingly accept for goods and services. People willingly accept the medium of exchange because they believe it can be used for other transactions. A unit of account is a measure people use to post prices. A currency provides a common measurement unit of pricing, enabling direct comparisons across different product or services. Finally, a store of value is something that individuals can use to transfer purchasing power over time” (Congress, pg 207)
Former Federal Reserve Chair Janet Yellen considers Bitcoin a speculative asset, not legal tender. In the grand scheme of things, this isn’t an outrageous statement. One could, however, argue that Bitcoin can currently be used to pay for goods and services from companies like Overstock, Virgin America, or Amazon (via Purse.io — not affiliated with Amazon)
Transaction Speed Issues
If you have Bitcoin and have made transactions with it, for example, to a friend on a platform like Bread, you may notice that the transaction is not immediately settled. This is because of the Bitcoin blockchain’s mempool and block size limits (won’t discuss in this post but check out this link for FAQs).
When the network is overloaded with transactions, it cannot process them all quickly. When there is a minimal amount of Bitcoin transactions, your transaction will process quicker. To state it reductively, this is an issue which led to the Bitcoin/Bitcoin Cash fork.
You might think then, “Why use Bitcoin? I could just pay someone through traditional methods and let Visa or Mastercard handle the transaction.”
Trusting Third Parties
Yes, you could do that. The rise of Bitcoin though brings up a much larger issue than just transaction speed. Bitcoin was created as a peer-to-peer electronic cash system, so as to not put the fate of a transaction into the hands of a third party. Today, we blindly trust third parties like banks and governments to handle our money.
A few Google searches like “2008 Financial Crisis,” “bank fraud,” or “dollar decline” should raise your eyebrows.
So, yes, Congress does have a valid point about transaction speed but if that issue can be resolved and Bitcoin can be used to pay peers or businesses, we wouldn’t have to deal with third parties who can alter their motives to reflect their own interests as opposed to the public’s.
US Dollar Inflation and Purchasing Power
Currently, we use the US Dollar as our primary currency, satisfying the functions of a currency mentioned earlier. The dollar can be printed on demand by the Treasury Department and as a result, we are subject to inflation impacting the value of our money.
Funnily enough, the report does acknowledge that
“the dollar loses about two percent of its value per year.” (Congress, pg 208)
Economically, inflation isn’t the only factor to consider when valuing Bitcoin or other cryptocurrencies. Purchasing power is an economic principle which defines how much “power” your money actually has.
While the dollar continues to lose value due to inflation, the report claims purchasing power of a single USD remains relatively constant. Whether that’s true or not is up for debate.
Inflation still plays a huge part in our purchasing power. Look at the chart below; while you may not have been alive in the early 1900s to realize the effects now, you will be alive decades from now. Year over year, you won’t really notice the loss of power but when it adds up, you could be looking at a chart similar to or worse than this reminiscing on the “good ol’ days.”
Valuing Products and Services in Bitcoin?
With Bitcoin, no entity can simply create more Bitcoins. Bitcoin was programmed to have a maximum capacity of 21 million coins. This means that once the 21 million coins have been mined, no more can be created. Like energy, you wouldn’t be able to create or destroy Bitcoin, only transfer.
You might wonder, “how will products and services be valued”? In the near future, I suspect that products and services will still correspond their value to the US dollar. The US dollar will not go down easily. Even now, many cryptocurrency investors and traders peg their profits to the US dollar, using the crypto market as a profit mechanism.
What if you kept accumulating Bitcoin though? Bitcoin is inherently deflationary so the inflationary issues of the US dollar would not pertain; merchants could simply charge prices based on the fundamental economic principles of supply and demand.
Such a view seems far-fetched, but is a view nonetheless. Consider the transition of our economy from a barter-based economy to a cash/credit based economy. Our ancestors were trading goods/services, not exchanging fiat money. A universal (or nationwide) currency was not a concept centuries ago but eventually the US dollar came to be. Could we, however, go back to a barter-based economy exchanging altcoins/tokens? Just some food for thought…
The Emergence of a Sharing Economy
The cash-based economy has been around long before many of us were born but we would be ignorant to not recognize the crumbs of a sharing economy coming in to play.
You may not have heard the term “sharing economy” but you’re probably living in it right now. Investopedia defines the sharing economy as
“a peer-to-peer (P2P) based activity of acquiring, providing or sharing access to goods and services that are facilitated by a community based online platform.”
Some examples include Uber, Airbnb, and WeWork.
So will Bitcoin be the new pegged currency? Will it be the new USD, whence we can exchange Bitcoin for another token or cryptocurrency and immediately exchange those tokens for a product or service? Will exchanges like Bittrex, Binance, etc. remain the facilitators of this sharing economy with regards to tokens? These are all questions yet to be answered but observations which must be accounted for.
Our government is not ignorant to this possibility, per this excerpt,
“cryptocurrencies resemble real assets or commodities more than currencies, though their future role could expand to include functioning as mediums of Exchange.” (Congress, pg 209)
This acts as a good segue into the report’s section on securities regulation. In the last year, various software teams have launched “ICOs,” or Initial Coin Offerings to the public to raise capital. A user could participate in the ICO by staking Bitcoin or Ether (Ethereum’s native token) to receive a certain amount of the project’s token/cryptocurrency.
A prime example is the DAO’s launch on Ethereum. This launch was heavily scrutinized by the SEC because a bad actor exploited a security flaw and stole over $50 million worth of Ether. This led to the the proposal of a SAFT (Simple Agreement for Future Tokens), stating that
“presale tokens before a network operates should be considered a security available to accredited investors. Once the network is running, the tokens would be available to the public as utility tokens and not classified as securities,” (Congress, pg 220)
so if you did not participate in the ICO and are purchasing the tokens on an exchange, they should be considered as utility tokens.
SEC Chairman Jay Clayton has yet to remark on this proposal so the classification of tokens as securities is something to monitor closely.
Overall, Congress has identified valid concerns like consumer protection, security, and securities regulation. Cryptocurrencies offer personal freedom to the common man and if the government wishes to allow its citizens these freedoms, they will need to collaborate with leaders in the blockchain and cryptocurrency space. The public needs to know that the government has its best interests at heart or cryptocurrencies will continue to cement their presence in the economy and the government will be left in the dust as its people lose faith.
This report is a breath of fresh air to the people as we can see that our policymakers are not ignorant of the economic changes occurring around them. Still, Congress and the rest of our government will need to be tactical with its policy-making on blockchain and cryptocurrencies because if they fail to keep their citizens in mind, the public will resort to cryptocurrencies to support all their needs and move away from services provided by the government.
Note that I am NOT making any financial advice but rather offering perspectives. Any projects mentioned in this post should not be taken as investment advice and I hold NO responsibility for any financial decisions you make based on anything in this post; research is highly recommended. This post is strictly for informative purposes.
Additional Suggested Research Topics:
Mempool, Block Size Limit, Bitcoin / Bitcoin Cash Fork, Segregated Witness, Lightning Network, Inflation, Purchasing Power Parity