Crypto: How to put the Genie back in the bottle

Now that Peter Thiel has let the cat out of the bag, what is there to do?

Yes, no question, China’s role in crypto has little or nothing to do with operating just another business. Rather it’s creating a Trojan horse it can use to undermine the dollar reserve system and, if needed, actually create instability in the financial institutions themselves. This is part of the larger project to sow doubt about the Western Liberal Democratic model and its (albeit flawed, but extant) support for universal human rights and democracy.

It’s not easy at this point to take away the increasingly valuable asset from the large number of people and business that have become enthralled and invested.

The option that China easily took back in November 2019 to get its citizens off of Crypto is not an option for the the world’s democracies:

1. Outlaw for all Chinese citizens purchasing or selling crypto
2. Outlaw operating a crypto exchange on Chinese soil
3. Outlaw Chinese citizens possessing an account on any foreign exchange that trades crypto
4. And, oddly, permitting all citizens who owned crypto at the time the laws were changed to keep it if it was stored in a personal wallet.

The penalties for violating these laws include prison and fines.

No western liberal democracy at this point would be able to do this, since there are such large stakes now both in the hands of individuals and, most unfortunately, mainstream institutions (banks, brokerages, corporate treasuries, etc).

And the crypto secondary economy is becoming huge. This is best represented by the $100BB pre-market issuance valuation of Coinbase. Stopping this in some way will have a huge impact. The number of lobbyists, lawyers, banks, exchanges, and venture capital companies involved in this single action presents a giant obstacle. And there is the complete set of these same banks and other players that see whole new lucrative revenue streams in providing all the various services for crypto that they provide for legitimate financial instruments, from investing advice to custody.

This is an enormous problem that should have been seen earlier.

So, what can we do?

The problem of putting the Genie back in the bottle is tough but not insoluble. An outline is as follows.

A regulatory regime can be put in place that creates timetables for individuals and institutions to divest their crypto holdings. This would be incented by a schedule for not applying capital gains taxes and in some cases providing tax credits. The schedule would give a complete exemption for all accounts that liquidated effectively all their holdings in a short, fixed amount of time. Those exemptions would reduce over time and eventually expire.

For companies to exit their crypto services, similar exemptions, tax credits and schedules could be created. And a regime could be set up to trade these credits for a fixed amount of time with business outside the crypto economy. All of this would be conditional on a timeline and the type of business.

For venture investments and exchange plays like Coinbase, there would probably have to be greater creativity to induce them to step away from the poison. One way of doing this would be to permit easy and otherwise incented (TBD) means for these to invest in mining operations and technology here and offer the services to non-USA/non-EU countries. There are some significant problems with the latter, but I will elaborate later on ideas that wouldn’t simply palm the problem of crypto off onto corrupt or inept governments elsewhere. More to come on this topic.

But, as the saying goes, we cannot afford to do nothing.