The absurdity of Bitcoin as legal tender + Warren agonistes
Mar 21, 2022
So Elizabeth Warren introduced a bill as expected, but it did not include the Mnuchin self-hosted wallet rule as I feared, which is good. (It’s my understanding that the Mnuchin rule was in an early draft of the Warren bill, and I can only guess that the fact that the rule has nothing directly to do with Russian sanctions led it to be dropped.) Nevertheless, the Warren bill is still awful.
It seeks to penalize anyone who without knowledge or intent, whether directly or indirectly, facilitates sanctions evasion using cryptocurrency. That means that all miners, node operators, and protocol and smart contract developers would be on the hook for merely publishing code or relaying data. The bill also seeks to punish ordinary Russians crypto users who are likely against Putin and his war. The bill is unnecessary, over-broad, and unconstitutional, and we explain why in our full analysis, which you can read here.
On the bright side, I don’t believe Warren’s bill will get traction. It does not have bipartisan support, doesn’t seem like it will be attached to anything ‘must-pass’, and flies in the face of what experts and the Administration recommend regarding crypto and sanctions. Additionally, Sen. Warren thoroughly embarrassed herself with her performance at the Senate Banking Committee Hearing at which she announced the bill. It had been a serious, sober, and edifying exchange between members and experts before he arrive to grandstand.
You should watch that. Her committee brings before it the world’s foremost expert on tracking crypto for law enforcement, and instead of asking questions to learn, she tries to bully him into accepting a false narrative for her own purposes. As the kids say, not a good look. I wonder if some of her co-sponsors aren’t having second thoughts. And I doubt the effort in the House will be more serious given the companion bill is being led by Rep. Brad Sherman.
Finally on this topic, I’m often asked why Elizabeth Warren is so intensely against crypto when one would think that, given everything else she stands for, she should be enthused by crypto. Obviously, I can’t read her mind, and I think it’s good practice to take people at their word unless and until they prove themselves to be mendacious. But here’s some speculation about why someone in her position might be so hostile.
While you’d think that crypto would be right up the alley of a progressive who campaigns against big banks and big tech, it would be all too human for them to instead see crypto as a competitor to, and substitute for, all the policies they have spent their whole life developing and championing. And giving in to this jealous instinct is easy when crypto is associated with their outgroup (i.e. right-wing free-market libertarian ideology). Given the logic of negative partisanship that I’ve discussed before, anything the outgroup is for, one must be against. And given what I’ll discuss in the second half of this newsletter, it’s not surprising that this perception of crypto persists even though, as Kevin Roose put it accurately in the NYT this past weekend,
There are right-wing Bitcoin maximalists who believe that crypto will liberate them from government tyranny; left-wing Ethereum fans who want to overthrow the big banks; and speculators with no ideological attachments who just want to turn a profit and get out. These communities fight with one another constantly, and many have wildly different ideas about what crypto should be.
In any event, I will let you know if the Warren bill amounts to much more, but I don’t think that’ll be the case.
Maxis Sure Love Their Tendies
I inadvertently started a feud on Twitter last Tuesday when I innocently asked, “Why do people think making Bitcoin legal tender will do anything?” That day I had seen two persons announce their Senate candidacies on a platform of making Bitcoin legal tender, which seems to me to be an obviously ridiculous thing to do. I wanted to know why people thought legal tender status matters.
What I got back was a deluge of confusion, illogic, and hostility that I was not anticipating. I doubt I have to explain to subscribers of this newsletter why legal tender status is not the number one policy priority for Bitcoin, and normally I’d just ignore these long-shot political efforts, but I think it’s worth addressing this legal tender thing for a couple of reasons. First, I think there are a lot of well-meaning people who are genuinely confused about the law, and it is worth jotting down some clarifications for future reference. Second, I think the fanaticism I encountered skews the public’s perception of Bitcoin, and that’s not a good thing. So, humor me as I address this topic.
In answer to my question, I got three main types of responses:
Legal tender status means capital gains tax on Bitcoin transactions would be eliminated
Legal tender status would be a symbolic stamp of approval from the government, which would take “banning it” off the table
Legal tender status would force people to use Bitcoin (thus making number go up or, more charitably, emancipating the people from financial tyranny)
Let’s take these in turn.
There is absolutely nothing about legal tender status that has any effect on capital gains tax. There just isn’t. All legal tender status means is that courts will recognize the tendering of the designated medium as sufficient to discharge a money debt. That’s it. It means that if a court finds you owe me $1,000 for breach of contract, you can have that debt discharged by tendering $1,000 that I will have to accept. If you tender something other than legal tender (say, $1,000 worth of rice or USDT), I can accept it if I want to, but if I don’t, then the debt isn’t discharged. It has nothing to do with taxes, and the section of the tax code that deals with capital gains doesn’t mention legal tender at all.
The idea that making Bitcoin legal tender will eliminate capital gains is some kind of meme legend. One surprisingly common reason for the confusion that I discerned from the replies I got is that some people think that the reason capital gains isn’t owed on the disposition of dollars is that dollars are legal tender. Of course, the reason there’s no capital gains owed on the disposition of dollars has nothing to do with legal tender; it’s that one doesn’t experience capital gains in dollars because the dollar doesn’t fluctuate in value against the dollar.
It’s also probable that the myth persists because it’s heavily promoted for some reason by people who seem to know better. When I pointed out that a law making Bitcoin legal tender would have no effect on capital gains tax, one booster of the theory replied that it “depends on how the language is drafted.” Well, by that logic a law to make daylight saving time permanent could eliminate all capital gains on Bitcoin if it was drafted to include a clause that did so. So I guess it would be fine if I went around saying that making daylight saving time permanent removes capital gains tax from Bitcoin? And that passing a daylight saving law should be the top priority for the Bitcoin community.?
If what you mean by “making Bitcoin legal tender” is “making Bitcoin tax free,” then you should say that. Otherwise you’ll confuse matters and make yourself look like you don’t know what you’re talking about.
After some back and forth with commenters on what legal tender would and wouldn’t accomplish legally, some resorted to the idea that the point of pursuing legal tender status was largely symbolic. It would confer on Bitcoin a sense of legitimacy and allay the fears of some that it is fringe or that the government will ban it. While that’s not a completely illogical idea, it’s strategically preposterous when you think about it for more than a second.
There are so many concrete challenges right now from government that it makes no sense to make a long-shot symbolic gesture one’s top priority. Like what? On the reactive side, the tax provisions of the infrastructure bill become binding on Jan. 1, 2024 and are no joke; Hawaii is deciding the future of crypto in the state right now and it’s not looking great; the SEC is quietly considering an expansion of regulation aimed at decentralized exchange protocols like Bisq; we have just a few months to try to influence the reports that will come out of the Biden executive order, etc. On the proactive side, we desperately need a de minimis exemption from capital gains for personal transactions, like the one Coin Center has gotten introduced in the last three Congresses and that has now been adopted by Sen. Lummis. These are what top priorities look like, not symbolism like legal tender status. And the fact that Bitcoin has so many challenges before it should give one a clue about how likely it is that Congress will anytime soon bestow upon Bitcoin legal tender status. Again, why would you argue a merely symbolic issue with such a low probability of success is the single issue that matters most?
Finally, there was one type of response to my question that was at least clear and accurate about what legal tender status would accomplish under law, and that is that it would force a great number of persons who would not otherwise adopt Bitcoin to do so.
Some folks mistakenly argued that legal tender status would force merchants to accept BTC, but of course that is not true. Dollar bills are legal tender, but no doubt you’ve seen stores that do not accept cash. (No, they’re not breaking the law.) Again, legal tender law only applies to debts; it requires creditors to accept the designated medium in payment of a debt. It does not require persons to accept anything they don’t want for goods, services, labor or anything else. Others understand this and nevertheless point out that essentially all businesses in the economy are creditors, and legal tender status would force them all to accept BTC if tendered.
First I’ll point once more that given all the challenges and skepticism Bitcoin faces from government, it seems unlikely (unthinkable?) that the same government will choose to force all businesses to accept Bitcoin. More importantly, however, using the coercive power of the state to force Americans to use Bitcoin is reprehensible and certainly not the way we should want to see Bitcoin succeed. (I’m surprised I have to say this to Bitcoiners.) And putting aside morality, I’m not sure such coercion is practical. For one thing, if a debtor tenders BTC for a USD invoice, will the reaction of a creditor caught unawares be to embrace the tech, or rather to make a note to never again extend credit to that debtor?
Finally, I hesitate to even raise the question, but why Bitcoin? Why not give legal tender status to some other cryptocurrency? Or to all of them? Or to anything else? I’m afraid to ask because the answer to that will likely be religious in nature and to that there can be no counter. All I can say to those who will listen is that we’re all in the same boat. Those policy challenges I mentioned above (and more I didn’t) don’t discriminate among coins, so it makes little sense to segment political activism by coin. It’s self-defeating.
Additionally, law should be technology neutral. It shouldn’t favor one technology over another. Instead it should only foster an even playing field and allow for competition. For example, to the extent we’re concerned about the environmental impact of Bitcoin’s electricity use and see it as a negative externality, the correct policy prescription would be to place a tax on CO2-emitting electricity generation, not on proof-of-work mining specifically. Yet by embracing policy positions that favor Bitcoin over other technologies, one gives up the ability to credibly make an argument for tech neutrality under law.
Anyhow, thanks for letting me get all that off my chest, and here’s to an uneventful week.
Various & Sundry
On March 30 at 4 p.m. I’ll be speaking on a panel discussion titled “Crypto and National Security: How to Validate American Innovation and Verify U.S. National Security” and hosted by the National Security Institute at the Antonin Scalia Law School at George Mason University. Other panelists are Sheila Warren of CCI and Juan Zarate of K2 Integrity. It will be moderated by Laura Shin. You can register to watch online here.