In recent days, the internet has been abuzz with the news of Joe Biden's proposed hike of federal capital gains tax to 43.4% for the highest earners. However, unsubstantiated rumours swirl of another, far more significant reform to American taxation: an 80% tax on cryptocurrency transactions. If true, it must be conceded that such a reform hasn't emerged from a clear blue sky. Cryptocurrencies have been embroiled in a swirl of legal and political chicanery since the emergence of the asset class over a decade ago; various nations, such as Turkey, Nigeria, and Bolivia, have simply banned the trade of cryptocurrencies entirely, and India continues to dangle the Sword of Damocles of prohibition over its nascent cryptocurrency field. The American state has historically clamped down viciously on any threat to the supremacy of the U.S. dollar and there indeed exists, rather ominously, a constitutional basis for the prohibition of cryptocurrencies. Article 1, Section 10 of the American constitution explicitly prohibits citizens from printing their own currency, enabling the eradication of Bernard von NotHaus' Liberty Dollar by the U.S. state in the 2000s, and NotHaus' own incarceration in federal prison for up to 15 years.
Of course, cryptocurrency advocates would differentiate themselves from NotHaus on the basis that cryptocurrencies are explicitly and necessarily decentralised and international, whereas the Liberty Dollar was a particularly American phenomenon. Precious metals are a useful analogue, existing as a global asset class beyond the purview of any nation state. Nonetheless, the economic trajectories of these two asset classes have been wildly different: while the value of precious metals has stagnated over the course of the 2010s, struggling to keep pace with inflation, the cryptocurrency field has enjoyed an enormous gold rush. In the 2020-21 bull market alone, a single increment of Bitcoin has multiplied in value 12 times over; Ethereum 18 times over; Chainlink 15 times over. These are not returns feasible in the traditional stock market, and therein lies the crux of the American state's enmity to this asset class.
Critics of Biden will simply attribute his proposed tax rises to the leftist preference for a high-tax economy, but this is only a fragment of the complete picture. Central to understanding this is the concept of price discovery, and how it differs when applied to the U.S. dollar, as opposed to cryptocurrencies. The 1944 Bretton Woods Agreement saw the dollar matched to gold, which regulated its value, until Nixon un-moored the dollar from the gold standard in 1971, rendering it a freely floating fiat currency: a currency bereft of any inherent value, deriving value only from the authority of the state producing it. The dollar thus entered a dream-world in which its value was simply arbitrarily determined by the Federal Reserve, detached from the value of any conventional assets and vulnerable to political manipulation by the U.S. government. The Covid-19 pandemic ably demonstrates this, with the Federal Reserve printing a quarter of all U.S. dollars currently in circulation in 2020 alone, to paper over the economic and social fissures exposed by the pandemic. Such politicised interventions in the American economy had ultimately been enabled by Nixon's decision to leave the gold standard; unlike the dollar, gold is a global asset beyond the control of any state. Even were it not, a government could not simply print more gold. In contrast, price discovery in the cryptocurrency field occurs from the outside in, with traders simply exchanging an asset for what they believe it to be worth, which in turn determines value. This has long been the Libertarian case for cryptocurrency: that unimpeded market forces determine value without any state involvement whatsoever, the asset class functioning as economics without politics.
Consequently, cryptocurrency policy must not be registered through a reductive left-right binary, but instead with the recognition of an American state imperiled by the existential threat to its authority posed by cryptocurrencies, using every economic mechanism at its disposal for the containment and mitigation of this danger. Such mechanisms are, in truth, few. Taxes can certainly be levied on cryptocurrency transactions, but there are no practical means by which the American state can directly determine the value of a cryptocurrency. Hiking taxes on transactions may stymy demand within the U.S., but this asset class is international, inherently limiting the effectiveness of such a measure: the policing of cryptocurrency trades within American borders has no bearing on transactions in Beijing, London or Santiago. While the fall in prices caused by such a policy may implicitly dissuade overseas buyers, the U.S. is a single fish in a far larger pond, over which it can exercise no direct control. Conversely, a more strident position could theoretically be adopted that sees the American state ban cryptocurrencies outright, but the increasing entanglement of the cryptocurrency field with other branches of American finance problematises this. Recently, Goldman Sachs announced that they will begin facilitating transactions in Bitcoin, and large quantities of institutional investment are pouring into this sector. In time, without state intervention, cryptocurrencies will likely exit the technologically primitive and highly volatile Wild-West period of expansion in which they currently exist, and integrate into the American and world economies as an asset class similar in some respects to precious metals.
Despite this, it cannot be overlooked that the cryptocurrency field, in its current state, is not comparable to traditional branches of finance and investment on several key bases. It is little secret that the world of high finance is a cloistered and nepotistic boys' club, its exclusivity a necessary precondition of the social and economic prestige it commands. For those outside this world, and lacking the specialised qualifications to earn entry, access is mediated by banks and online trading apps. These mechanisms rig the game against the small investor, in a variety of explicit and implicit ways. First, there are barriers to entry. There is a dearth of apps facilitating options trading accessible in the U.K. for instance, and one of the few that exists, Saxo, stratifies access to its features based on the initial capital a user is able to display. Once a user gains entry, the game is rigged again. Bloomberg terminals, which offer a level of detailed market analysis inaccessible to the small investor, are owned generally by large financial institutions, and command a leasing fee of $24,000 per year should said small investor seek to rent one out. The result is the trampling of any vestiges of social mobility in finance. In order to enter this world, you must have money, and in order to succeed, it is helpful to have more. Admittedly, fewer restrictions exist in the conventional stock market, where no initial declarations of capital are necessary to access trading apps. Nonetheless, potential returns from stocks pale when compared to those of options trading or, as previously established, cryptocurrencies.
Herein lies the problem, from the perspective of the U.S. government and large financial institutions: no such restrictions to entry exist in the cryptocurrency field, and the potential rewards for ordinary traders are vast. Irrespective of the challenges it poses to the American state, cryptocurrency is a threat in that it is potentially an engine of enormous social mobility, existing largely outside the control of Wall Street. Stories have abounded in recent weeks of ordinary people making millions from Dogecoin; financial analysts have largely chalked this up to chance, or the mania phase pre-empting a market crash, and they are probably at least partially correct. However, the parabolic 5637% explosion in Dogecoin's trading price over the course of the last year is a story in itself, irrespective of the coin itself and the fortunes made and lost trading it. It is reflective of a broader climate of extreme volatility in the cryptocurrency field, which continues to expand at a rapid pace. There will be corrections and cool-downs, and in the short to medium term a crash is indeed likely, but barring any large-scale state intervention this asset class will continue to grow for the foreseeable future. The American state is thus considering more radical measures not merely for the perpetuation of its own authority in the face of this existential challenge, but the perpetuation of an economic order it is able to understand and control. The gold rush remains in progress, but perhaps the powers that be are beginning to circle their wagons.