The Janet Yellen Bitcoin Era Begins
This week Janet Yellen assumed office as the new Treasury Secretary. What does this mean for crypto?
We have a newly-minted US Treasury Secretary, Janet Yellen. She is the US political establishment’s insider’s insider, and the crypto ecosystem is now grappling with what her appointment to Treasury will mean.
Yellen is the fifth Treasury head in Bitcoin’s lifespan.
First was Paulson (2006-2009).
Then Geithner (2009-2013).
They viewed Bitcoin as a curiosity and something of a fad.
Then came Lew (2013-2017). And the dire warnings began.
In 2017, Steve Mnuchin became Treasury Secretary (2017-2021), and he took by far the most aggressive stance against cryptocurrencies that we’ve seen.
That’s to be expected: he came into power at the time of the dramatic Bitcoin bull run of 2017. An initial coin offering craze poured new investors into crypto markets. We had what looked to be a never-ending price spike.
In 2020 DeFi’s stratospheric rise mixed with heavy institutional investment in bitcoin created a boom that left observers stunned.
Literally nothing like this had ever been seen in financial history.
Peer-to-peer electronic cash was proving to be a direct challenge to many assumptions about money and finance. Bitcoiners were openly touting how it has the potential to kill the US dollar.
Politicians were scared.
As a result, then-Treasury Secretary Mnuchin spent his tenure flexing his considerable rhetorical muscles in favor of tamping down on cryptocurrency so it wouldn’t challenge the global financial order. He took it as his task to somehow shoehorn this decentralized, stateless money into institutional regulatory norms such as Know-Your-Customer (KYC) laws.
The Mnuchin-led Treasury was the first to aggressively target crypto holders on the payment of taxes relative to speculation gains. While claiming to promote financial innovation, he warned against crypto-led price bubbles, growing institutional dabbling, and non bank-issued stablecoins.
It was the most attention the US government had given Bitcoin to that point.
When Bitcoiners saw this press conference at the White House, the direct attention was both celebrated by the ecosystem and gulped at. Bitcoin was clearly more than a fad. We’d arrived.
US Treasury Secretary Mnuchin talks Bitcoin: what he REALLY means
Unwittingly, Mnuchin brought Bitcoin into the mainstream, and in his final year at Treasury, his goal was to turn chest beating into concrete policy — real regulation.
He rolled out plans to essentially ban non bank-issued stablecoins.
He teamed with FinCEN, the Financial Action Task Force (FATF), and G7 leaders to roll out stifling wallet rules. He was so brash that many were “troubled” by Mnuchin’s “plans to enact burdensome regulations on digital self-hosted wallets” without first going through the legislative process.
Mnuchin’s tenure ended with the end of the Trump administration. He had tried to push through all this new legislation at the last minute, and because it was all so rushed, anything that was not yet through was frozen when the new administration came to power.
In this new administration, the Treasury is headed by Janet Yellen.
So will she pick up where Mnuchin left off? We have heard before where she stands on bitcoin, because she was the Fed Chair from 2014 to 2018. As the head of the US central bank, she too witnessed Bitcoin’s coming of age, but she reacted very differently to Mnuchin in part due to being at the Fed rather than Treasury.
During her tenure, Mt. Gox toppled and imploded, and Ross Ulbricht was in the process of being sent away for life. In 2017, Bitcoin exploded beyond anyone’s imagination, video-bombed hearings, and all the while Yellen remained nonchalant.
She said:
“The Federal Reserve simply does not have the authority to supervise or regulate Bitcoin in any way.”
So is this low-key response a reflection of how she’ll act as Treasury Secretary also?
Not likely.
Fed Chair and Treasury Secretary are 2 very different roles, and often conflated.
The incestuous nature of such appointments can easily lead a rational person to conclude Treasury and Fed functions are interchangeable.
Legally, they’re not.
The Fed operates in a kind of political purgatory. It’s not audited. Its machinations are largely secret.
The Fed occupies a rarified space where it’s not quite public and it's not quite private, and it often claims independence from politics. It’s the US central bank effectively in charge of monetary policy -- the lender of last resort, the lender to lenders. Its charter is to maximize employment, stabilize prices, and moderate long-term interest rates through credit, through a system of loans. And while there’s certainly more to the Fed, its operations are distinct in this regard from the Treasury.
Whereas the Treasury is in charge of financial regulation.
The Executive Branch is tasked with law enforcement. Treasury is its top financial cop. The Treasury’s labyrinthine of bureaus include the US Mint and IRS, among many, many others. It has tens of thousands of employees and a budget in the billions.
So, while Yellen may have wanted to stay out of bitcoin as Fed Chair, she’ll likely dive right in as Treasury Secretary simply due to the nature of her new role.
She is, after all, a DC creature, comfortable in the trappings of government power and well-regarded in the corridors of finance and regulatory agencies.
During her pro forma confirmation process (a foregone conclusion), Yellen was asked about her current stance on cryptocurrencies. Page 93 of her remarks reads:
“I think it important we consider the benefits of cryptocurrencies and other digital assets, and the potential they have to improve the efficiency of the financial system. At the same time, we know they can be used to finance terrorism, facilitate money laundering, and support malign activities that threaten U.S. national security interests and the integrity of the U.S. and international financial systems. I think we need to look closely at how to encourage their use for legitimate activities while curtailing their use for malign and illegal activities. If confirmed, I intend to work closely with the Federal Reserve Board and the other federal banking and securities regulators on how to implement an effective regulatory framework for these and other fintech innovations.”
What does this statement tell us? Not much, it’s pretty vague. Although the use of the phrase “encourage their use for legitimate activities” has gotten some people excited.
Meanwhile, ahead of Yellen’s first day as Secretary, a little known bureau within Treasury, Office of the Comptroller of the Currency (OCC), rather suddenly issued a letter, Federally Chartered Banks and Thrifts May Participate in Independent Node Verification Networks and Use Stablecoins for Payment Activities. This signals greater flexibility for institutional banks with regard to interacting with crypto.
Days later, the OCC announced granting conditional approval to Anchorage Trust Company to become Anchorage Digital Bank. It’s the first federally-chartered crypto bank in the US.
The acting comptroller overseeing these announcements stepped down with the previous administration, but the Biden administration is expected to nominate former Ripple advisor Michael Barr to head the OCC.
Chris Brummer is set to be Biden’s CFTC chair, and is considered a crypto-literate regulator, if not somewhat sympathetic.
Gensler is set to be the SEC chair, and isn’t necessarily a fan of crypto, not by a long stretch, but he’s a serious thinker on the subject of the future of payments.
Together with Yellen as Secretary this might be the most experienced Bitcoin administration in the digital money’s history.
Again, Yellen was in power at critical times in Bitcoin’s growth. She’s witnessed many frothy markets, and might understand how beneficial crypto could be for regular folks in terms of lower fees and more financial freedom.
Of course, those could easily be a bug for Yellen, not a feature.
Quick Bytes
Blackouts in Iran Blamed on Bitcoin
Major cities in the Islamic Republic of Iran went dark last week.
“With toxic smog blanketing Tehran skies and the country buckling under the pandemic and other mounting crises,” the Associated Press (AP) explained, “social media has been rife with speculation. Soon, fingers pointed at an unlikely culprit: Bitcoin.”
Bitcoin mining data centers, apparently, were taxing the grid. The country once thought recently to be open toward Bitcoin (due in large measure to international economic sanctions) “shuttered 1,600 centers across the country, including, for the first time, those legally authorized to operate,” the AP noted.
The article was keen to point out Bitcoin might be the convenient scapegoat for a government searching for blame rather than admitting incompetence. Again, in recent months, regulators in the nation sought to take advantage of comparatively low energy rates, helping to rank Iran “among the top 10 countries with the most Bitcoin mining capacity in the world — 450 megawatts a day.”
There appears to be policy schizophrenia, however, as policy makers are wary of inviting Bitcoin in as competition to its own sovereign currency while wishing to exploit booming world speculation markets.
“On one hand,” the AP continued, “it wants to capitalize on the soaring popularity of digital currency and sees value in legitimizing transactions that fly under Washington’s radar. It authorized 24 Bitcoin processing centers that consume an estimated 300 megawatts of energy a day, attracted tech-savvy Chinese entrepreneurs to tax-free zones in the country’s south and permitted imports of computers for mining.”
Conversely, “the government worries about limiting how much money is sent abroad and controlling money laundering, drug sales and internet criminal groups,” attracting still more negative attention and giving further pretext to global adversaries for more sanctions.
The Double-Spend That Wasn’t
“There was a stale Bitcoin block today,” BitMEX Research alerted recently, “at height 666,833. SlushPool has beaten F2Pool in a race. It appears as if a small double spend of around 0.00062063 BTC ($21) was detected.”
Researchers further pointed out that a “transaction in the losing chain sent 0.00062063 BTC to the address 1D6aebVY5DbS1v7rNTnX2xeYcfWM3os1va, and a transaction in the winning chain which spent the same inputs only sent 0.00014499 BTC to this address.”
Colin Harper of CoinDesk argued “no bitcoin was ‘double-spent’ because no new coins were added to Bitcoin’s supply. Instead, the same coins from the same wallet were registered in two different blocks during a typical split in Bitcoin’s blockchain. The reason this does not qualify as a double-spend is because only one of these transactions (the one recorded on Bitcoin’s longest blockchain history) is considered valid by the network, while the bitcoin in the other transaction cannot be spent because the network does not consider it valid.”
Satoshi White Paper Takes Its Talents to South Beach
Recent dustups over rumors about how lawsuits might be pending against those who dare to host copies of the Bitcoin White Paper caused quite the Streisand Effect. In response, many supporters of peer-to-peer electronic cash took it upon themselves to personally upload a copy in defiance. Joining the rebellion was none other than the City of Miami.
“The City of Miami is actively exploring how we can best utilize Bitcoin and related technologies,” a blurb on the official website concluded, “and are committed to supporting and attracting businesses and entrepreneurs innovating in the space.”
Crypto Goes Ivy League
Ian Allison reported so-called Ivy League elite US universities such as Harvard, Yale, and Brown “have been quietly buying cryptocurrency for the past year or so through accounts held at Coinbase and other exchanges.” No word as to exactly which digital assets the endowments hold (or held), but Allison admits sources did explain whatever cryptos they hold amount to a fraction of the overall trust.
Lightning Network Supported by Large Exchange Based in China
Giant crypto exchange OKCoin announced it would soon be supporting the second layer scaling solution for Bitcoin, Lightning Network.
Looking to boost transaction speeds and spur the rise of microtransactions in the future, the exchange explained it “will integrate the Lightning Network into the OKCoin exchange in Q1 2021.”
As a result, the company expects transactions will clear “within a few seconds instead of up to an hour. It will also reduce our current minimum withdrawal / deposit from 0.001 bitcoin or 100k satoshis (~$35) to 0.000001 bitcoin or 100 satoshis (~$0.04). There is currently a maximum limit per transaction of 0.05 BTC (~$1,800). By integrating the Lightning Network, OKCoin becomes a node within the Network, connecting to other nodes in the Network for processing of transactions.”
Coinbase Will Go Direct, Eschewing IPO
Popular US exchange revealed more about its plans to take the business public. Its intent is “to become a publicly-traded company pursuant to a proposed direct listing of its Class A common stock.”
Last month, Coinbase disclosed it would seek SEC approval, but didn’t signal just how. The clarification is it will go to market directly, skipping over a traditional Initial Public Offering (IPO). In this manner, the exchange joins Palantir, Spotify, Asana, and Slack in letting investors sell into an already open market rather than looking for so-called fresh capital -- a move that could help in preventing dilution of eventual Coinbase shares among current holders.
Battle for World Peace
Check out the Decentralized Dance Party’s “peace bonds”, as they strive to make the world better through partying and dance! Launch party will be held at ETH Denver in February.
By C. Edward Kelso and Naomi Brockwell