Congress Should Welcome Cryptocurrency Competition

Currency competition is a process in which people are free to choose the currency that best fits their needs and currency issuers compete to meet those needs. As F. A. Hayek has explained, one of the key purposes of currency competition

In other words, welcoming currency competition would introduce market forces to the realm of money. This suggestion may appear unconventional given that many believe only a national domestic government is capable of issuing currency.³ However, government monopolies on money are only a relatively recent phenomenon: for example, the central banks in the United States and Canada were only created in 1913 and 1935, respectively. And history is rife with examples of private currency issuers.⁴ Moreover, even today the countries that have welcomed dollarization are clear examples of how beneficial access to currency competition can be.⁵

In cases where government monopolies have long preserved issuers of bad money, competition would introduce the motivation and inspiration to issue better money. That second feature—the inspiration for issuing better money—is especially important to understand because where alternatives are available, all issuers are able to better observe the preferences of the public and improve the attractiveness of their currency. Rep. Byron Donalds (R‑FL) described the benefits of currency competition well when he said, “World economies work best when you have a highly interactive … marketplace where people can exchange goods, products, and currencies. It’s actually to the betterment of all currencies when there are multiple options.”⁶

Although cryptocurrencies have not yet become a generally accepted medium of exchange in the United States, their initial success provides three key insights into what Americans would like to see change with the U.S. dollar and the traditional banking system. Congress should take note that cryptocurrencies are succeeding partly because of their potential to provide stronger financial privacy protections, faster payments clearing, and better transparency in monetary policy governance. Learning from the success of cryptocurrencies and improving the utility of the dollar would support the dollar’s status as the world’s reserve currency better than any attempt to restrict the market.

Millions of Americans refuse to have a bank account due to concerns about privacy and trust.⁷ Yet, in the fall of 2021, Congress essentially ignored these concerns and tried to lower bank reporting thresholds to just $600, a plan that was opposed by 66 percent of voters.⁸ While it is true that the Fourth Amendment to the U.S. Constitution should protect individuals from having their privacy violated by the government, that protection no longer extends to most financial records. Due to the third-party doctrine, the mere act of owning an account at a bank or an exchange is treated as a surrendering of one’s financial privacy.⁹

The decentralized nature of many cryptocurrencies solves the issue of the third-party doctrine by removing the third party. Therefore, financial investigators must seek permission from the owner of the account or seek a warrant from a judge if they wish to obtain detailed private information about the parties involved in a transaction. This subtle change in how transactions are conducted has ushered in a new era of possibilities for finance, and has also produced a new generation of Americans who are aware of just how little their financial privacy is protected in the traditional system.¹⁰

To strengthen financial privacy protections, Congress could amend the Right to Financial Privacy Act (RFPA)—an act that established a formal process for obtaining consumer information and restricted the ways in which the government may use that information.¹¹ Unfortunately, there are extensive exceptions within the act that have severely limited the protections it provides.¹² For example, none of its protections apply to financial information that is collected in accordance with the Internal Revenue Code or other types of government inquiries.¹³ Congress should strike these statutory exceptions so that if information is needed for investigations it can only be acquired through a court order.

The payments system (i.e., Fedwire) that supports the transfer of the dollar is both inefficient and outdated. George Selgin and Aaron Klein described it well when they wrote, “America’s payment system seems more like it belongs to a developing nation than to one of the wealthiest countries on the planet.”¹⁴ The problem with the U.S. payments system is that it can take three days or longer for payments, such as a paycheck, to settle and become available in the recipient’s account. This delay is partly because Fedwire is closed on both weekends and holidays.

Cryptocurrencies, by contrast, are not restricted by outdated “banker’s hours.” So long as one has access to an internet connection, funds can be transferred and settled in minutes or less, not days. It’s easy to underestimate the advantage of such transfers when one has a reliable or abundant cash flow. However, faster payments can make a big difference for people living paycheck to paycheck and for people caught in natural disasters or other crises.

To fix the speed of payments, the Federal Reserve (Fed) should expand the operating hours of Fedwire to better accommodate the economy.¹⁵ Although the Fed has tried to expand access to faster payments with the FedNow program (a real-time settlement service), that system has yet to launch. And worse, the Fed’s plan to enter the market as both a regulator of, and competitor to, settlement providers has stalled private sector innovations in faster payments.¹⁶ Expanding the operating hours of Fedwire, though, is something that can quickly and efficiently improve the speed of payments in the United States. Ideally, the Fed would reverse its decision to compete with the private sector on faster payments and shut down its FedNow program.¹⁷

Monetary policy has long been a subject of unnecessary mystery in the United States. It was not until 2011—nearly 100 years after its inception—that the Fed first started holding press briefings to present and explain the monetary policy decisions made by the federal open market committee.¹⁸ Yet the public is still mostly in the dark. For instance, what should be a simple equation—under the Fed’s new average inflation targeting regime—that anyone can calculate is, instead, anyone’s guess because the Fed has yet to share the time horizon or variables it uses in calculating the average. In fact, the Brookings Institution found that 50 percent of Fed watchers believe the Fed has not provided enough information about its strategy.¹⁹

Cryptocurrencies, like Bitcoin, are often far more transparent regarding the rules that govern their supply. The popularity of open-source code in the cryptocurrency community has made it so that virtually anyone may verify the status of a particular cryptocurrency. As noted by Norbert Michel and Gerald Dwyer,

To improve the transparency of monetary policy governance in the United States, Congress should require the Fed to adopt an explicit monetary policy rule that specifies targets and the consequences for failing to meet those targets.²¹ In theory, average inflation targeting is a step in the right direction because mistakes must be accounted for. However, in practice, the new framework appears to have only given the Fed more discretion. Whether it be with the current framework or a new one, Congress should require an explicit rule that anyone can observe and specify clear penalties for failing to meet the rule.

The initial success of cryptocurrencies does not just offer lessons for improving financial privacy, payments speeds, and transparency in monetary policy governance, though. A market that is free to compete and innovate will also lead to goods and services that complement one another. Notably, stablecoins that are pegged to the dollar are an enhancement, not a challenge, to the dollar’s status as the world’s reserve currency.

In fact, many officials have already recognized that stablecoins can benefit the dollar.²² In a speech in 2021, Federal Reserve Vice Chair for Supervision Randal Quarles said,

Representatives Blaine Luetkemeyer (R‑MO), Andy Barr (R‑KY), Ritchie Torres (D‑NY), and John Rose (R‑TN) have all echoed similar points.²⁴ Although other members continue to call for a crackdown on cryptocurrencies, a crackdown risks endangering this new advantage for the dollar. The problem that still lingers is that cryptocurrencies exist within an uncertain legal framework, but this problem is something that Congress can fix.

Legal tender laws are commonly misinterpreted to mean that anyone is required to accept, for example, the U.S. dollar, whenever it is presented as payment (this is known as “forced tender”). In reality, the dollar’s legal tender status only denotes its acceptability for the payment of taxes, fines, and contracts (unless another medium of exchange is agreed to in that contract). The Fed formally addressed the ambiguity over legal tender on its frequently asked questions page by stating, “There is no federal statute mandating that a private business, a person, or an organization must accept currency or coins as payment for goods or services.”²⁵

To avoid confusion between the U.S. legal tender laws and the forced tender laws in authoritarian regimes, Congress should clarify the statutes in the U.S. code on legal tender. For instance, 31 U.S.C. Section 5103 is titled “Legal Tender” and currently states,

Explicitly stating the limit of legal tender would make it clear that legal tender laws do not prohibit the use of alternative currencies. Such an amendment could take the form of adding the language already noted by the Fed such that the law reads,

Private coinage restrictions are similarly overdue for clarification. Although the prospect of minting physical coins may seem obscure in the context of cryptocurrencies, it was brought up at the end of 2021 when Sen. Sherrod Brown (D‑OH) asked Dante Disparte of Circle, “If you were a traditional finance company, [do you think] you could sell metal coins that say ‘U.S. dollar coin’ on them?”²⁷ And this very question was part of the case that the United States Department of Justice made against the NORFED American Liberty Dollar, a privately issued currency produced by the now-defunct National Organization for the Repeal of the Federal Reserve Act and the Internal Revenue Code.²⁸ As it stands, the private coinage laws present a dangerous steppingstone for enacting a ban on digital coins.

Mending the law should begin with 18 U.S.C. Section 485. Currently, the law prohibits coins that have a “resemblance or similitude” to U.S. coins, but it fails to define the necessary resemblance a coin must have to be considered an unlawful counterfeit of an existing U.S. coin. To clarify the law, Congress should add that a coin must possess some combination of official phrases (i.e., United States of America, Liberty, In God We Trust, and E Pluribus Unum) and imagery. Congress would need to amend 18 U.S.C. Sections 487–491 to accommodate this change, but it would only be a matter of updating the language for consistency.

Congress should also amend 18 U.S.C. Section 486, in which the law specifically forbids not just counterfeit coins, but also coins of original design. This change could be as simple as striking “or of original design” from the record:

Capital gains taxes act as a deterrent to cryptocurrency use and should be removed, at the very least, where cryptocurrencies are used for transactions, although ultimately Congress should amend the capital gains laws to level the competitive environment for other alternative currencies as well. First, capital gains tax rates are structured to incentivize long-term holding, which clearly discourages what is generally considered “currency use.” Second, the complexity of administering the tax creates an additional burden on would-be users of cryptocurrencies. Where a sales tax is usually a flat percentage added on to the bill, capital gains taxes require a cryptocurrency user to report the sales price, cost, timeline, and gain or loss for each transaction to the Internal Revenue Service. Specifically, users must record this information on Schedule D of Form 1040 to calculate the tax owed for each purchase of goods and services.²⁹

The capital gains tax should be eliminated from transactions in which one uses cryptocurrencies to purchase goods and services. While not ideal, the Virtual Currency Tax Fairness Act of 2022 would exempt personal transactions made in cryptocurrencies so long as the relevant gains are $200 or less.³⁰ However, there are three key changes that might improve the bill. The first would be to eliminate the $200 threshold while preserving the condition that a cryptocurrency is used for the purchase of goods and services (rather than to cash out). At a minimum, though, a second change would be to raise the threshold substantially ($10,000 or more) so that larger purchases could be made without additional taxation. Finally, a third change would be to scale the threshold for inflation.

By eliminating and updating antiquated laws that have discouraged currency competition, Congress would be welcoming a free, open, and fair financial market that would benefit the U.S. dollar. The initial success of cryptocurrencies has already shown that the American public desires stronger financial privacy protections, faster payments, and better transparency in monetary policy governance. If Congress takes the steps needed to welcome currency competition, it would gain the opportunity to not just create a stronger dollar today, but also to preserve its international status for tomorrow.