“Crypto” Is Silicon Valley Speak for Waste, Fraud, and Abuse

The Republicans in Congress, along with many Democrats, are rushing ahead with legislation to promote crypto currencies in various ways. Their motivation is not hard to understand; they got hundreds of millions of dollars in campaign contributions from the industry. In terms of economic policy, the effort to promote crypto is taking the country 180 degrees in the wrong direction. The only real question is how bad the results will be.

When we think of finance, we need to think of trucking. Just as we need the trucking industry to transport items to factories and stores, we need the financial sector to make payments and allocate capital. But both finance and trucking are intermediate goods; they don’t directly make us better off, like healthcare or housing.

The fewer resources (labor and capital) we devote to these sectors, the better. If we have fewer people working in these industries, it means that we have more people available to work in sectors that provide the items we value.

Everyone can understand this with trucking. If the size of the trucking sector had quintupled relative to the size of the economy in the last half century, we would probably all be talking about how incredibly inefficient our trucking industry is.

But almost no one complains about the inefficiency of our financial system, even though the share of some components (the securities and commodities trading sector) has quintupled over the last half century. Maybe this is because people in the financial industry teach at elite institutions, have columns in elite media outlets, and hold top positions in administrations of both parties.

But political power does not change reality. An efficient financial sector is a small financial sector, and our financial sector is clearly not small.

This is all essential background for any discussion of crypto. The crypto industry obviously intends to make money by pushing the stuff. The question is what will the rest of us get out of the increased use of crypto?

The answer is at best, not much. The best story from the crypto bros is that it will reduce transactions costs. They focus largely on the high swipe fees charged to retailers by credit cards.

These fees are in fact quite high, but this is the result of policy, not technology. In the European Union (EU) credit card fees are capped at 0.3% and just 0.2 percent for debit cards. The higher fees in the U.S., sometimes over 2.0 percent, is due to the way our system of credit cards is structured.

Credit card issuers offer cardholders a variety of benefits, from frequent flyer miles on airlines to direct cash back on purchases. The high swipe fees cover the cost of these benefits.

If the U.S. government capped fees, like the EU, credit card issuers would stop offering these benefits. Since the banks that issue the cards, as well as their partner companies, and credit card users, are all happy with the current situation, we don’t get regulation, and the cards continue to charge high swipe fees. Perhaps crypto can offer a way around this roadblock, but we should be clear, the savings are at the expense of people’s credit card goodies, not an actual increase in efficiency.

There could be some modest gains in efficiency from transacting in stablecoins, ignoring the regulatory issues and the need to change back to dollars, but these could all be obtained by allowing the Fed to create a digital dollar. The financial industry has lobbied hard to ensure the Fed does not create a digital dollar, or give all us all free digital bank accounts, because they want our money.

Again, the issue is not efficiency; it is a regulatory roadblock created by the financial industry. Effectively, the industry is saying that if we pay them lots of money in fees, they will let us move to a more efficient system of transactions, otherwise they will use their power to block it.

But we also need to get back to the issue of regulating the issuance of crypto currency, since that is what these bills are largely about. Effectively, they want the government to give the Good Housekeeping Seal of Approval to cryptocurrency so that consumers and businesses feel more comfortable using it.

This is most clear with the GENIUS Act and its treatment of stablecoins. These coins are supposed to be backed one to one by highly liquid assets, like dollar reserves. Folks not born yesterday know that issuers will try to find ways to skirt these reserve requirements in order to increase profits.

But don’t worry, we will have Donald Trump’s Commodity Futures Trading Commission watching them like hawks. (Yes, that is sarcastic.) But it gets worse, small issuers with less than $10 billion in stablecoins outstanding, will be regulated by the states.

There is a long history of bank runs in the United States and elsewhere which should be in everyone’s mind as Congress rushes to pay off its campaign contributors. Most of us can remember how the banks and other financial institutions pushed themselves into bankruptcy when the housing bubble collapsed in 2008-09, only to be rescued by government bailouts.

But we don’t need to go back to this ancient history. The Silicon Valley Bank, which had deposits from many of our big crypto promoters, faced bankruptcy in the spring of 2023, because the geniuses who ran it apparently did not know that the value of government bonds falls when interest rates rise. That bailout cost the government around $20 billion.

While it is understandable that the folks who stand to profit from having the government certify the value of their crypto, including Donald Trump and his stablecoin, would want these bills, there is nothing here for the rest of us. We are just looking at more bloat in the financial industry and the likelihood of more costly bailouts.

As has been and will always be the case, there is no use case for crypto other than black market transactions and facilitating ransom payments. But that doesn’t mean lots of rich boys can’t get richer from it.