To Boost Crypto, Break The Federal Grip On Americans’ Financial Rights

Despite the efforts of a few members of Congress, U.S. cryptocurrency policy remains a mess. For years, the Securities and Exchange Commission, most federal banking agencies, and many members of Congress have been outright hostile toward crypto.

But due to several new proposals, many crypto supporters are hopeful this hostility will fade. Over the last few weeks, Sen. Cynthia Lummis (R-WY), former President Donald Trump, and presidential candidate Robert F. Kennedy Jr., all announced proposals for the U.S. to create a bitcoin reserve.

Given the sad current state of U.S. crypto policy, however, it is doubtful these kinds of proposals would get things on track. Still, they provide a great opportunity to have a more fundamental conversation about how to improve crypto policy. To paraphrase my colleague George Selgin, there’s surely a good policy somewhere between the status quo and these reserve proposals.

And it’s vital that Congress finds it.

Crypto enables new forms of digital payments, where users can bypass traditional third-party intermediaries, such as banks and broker-dealers. In other words, it allows for person-to-person electronic transfers of digital assets, including money.

In theory, allowing people to spend money electronically in ways resembling how they’ve been spending cash shouldn’t be controversial, especially in America. Nonetheless, this feature, along with the potentially disruptive nature of crypto, has proven too much for politicians to overcome.

Some people don’t like that crypto is a competitive threat to companies in the traditional payments industry. Others don’t like that it’s a threat to the existing anti-money laundering regime. (That’s an especially big problem because the federal government has drafted traditional financial institutions to act as an extension of law enforcement.) Other critics see bypassing these systems as a threat to the U.S. dollar itself.

The specter of these threats has made it difficult to develop sound cryptocurrency policy, but there are two basic principles—principles that have been foundational to the United States—that can help Congress address these concerns.

The first one relates to the Fourth Amendment to the U.S. Constitution, which protects Americans against warrantless searches and seizures by the government. Thanks to the Bank Secrecy Act and its many amendments, Fourth Amendment protections have been all but eliminated when it comes to Americans’ financial records. The BSA gives law enforcement warrantless access to Americans’ financial records when they use a bank or any other financial institution.

Rather than adapt to the technology, many policymakers want to force crypto to adapt to a system that was designed to work with financial intermediaries. But crypto often upends the traditional role of intermediaries, thus forcing Congress to deal with how it has used those intermediaries to end-run the Fourth Amendment.

Many members of Congress (and the financial industry) now view the Fourth Amendment as a relic, somewhere between overly burdensome and an afterthought, unapplicable to modern America. But the Fourth Amendment was never supposed to be perfect. It represents, instead, the necessarily imperfect balance between the competing interests of individuals’ financial privacy and the government’s ability to gather evidence of a crime.

Reaffirming Americans’ Fourth Amendment rights, as Congress should do, would not be a license to commit crime. It would simply mean that law enforcement must demonstrate probable cause to a judge before accessing Americans’ financial records, just as they do for other searches.

The second principle—limited government—dictates that people, not government officials, are generally the best judges of which economic transactions are in their own best interest. Yet, the federal government now dictates which methods of payments are acceptable, which special institutions may facilitate those payments, and how those institutions may operate. Some members of Congress even want cryptocurrency banned because it doesn’t fit into this government regime.

The principle of limited government also answers the critics who see crypto as a threat to the U.S. dollar. The federal government is not supposed to be the provider of Americans’ money precisely because governments tend to debase currency. The U.S. government is supposed to refrain from debasing people’s money, and to protect people’s right to use money as they see fit. The government is not supposed to control every aspect of how people use their money or even what they use for money.

Critics of crypto assume that the government’s existing monopoly on money issuance maintains the dollar standard itself, but that’s incorrect. The prevalence of the U.S. dollar grew when gold and silver were recognized as money, and it does not depend on a specific type of paper currency or digital entries. The prevalence of the U.S. dollar derives from the country’s relatively strong legal and economic systems, especially as they pertain to protecting individual property rights.

Many advocates of cryptocurrency are frustrated because the federal government has failed to uphold these limited government principles and debased the currency. Americans now have effectively one choice for money, and even the person-to-person transfer of that currency is now highly regulated and surveilled.

So, it makes sense that so many crypto proponents are cheering on these reserve proposals in the hope that they will gain wider acceptance for Bitcoin. Unfortunately, these proposals do not directly address the underlying problems that have kept U.S. crypto policy such a mess.

Cryptocurrency will remain of limited use until Congress pares back the overly invasive regulatory framework that currently governs U.S. financial markets. To do so, Congress need only reaffirm the importance of the Fourth Amendment and a limited government.