From the War on Iran to the War on Crypto, the Secret Weapon is Digital Currency

With the war on Iran partially paused, this might be a good time to turn to the war on crypto. Everyone knows crypto, that giant cesspool masquerading as an alternative currency or a great investment opportunity.

As many of us have pointed out, the idea that Bitcoin would ever be an alternative currency was close to crazy. Given its wild fluctuations, we would constantly be seeing massive inflation or deflation if it were the standard currency rather than the dollar. For example, Bitcoin has fallen by more than 40% against its peak last fall, which implies we would have seen 40% inflation over the last six months if everything was priced in Bitcoin.

The one identifiable use for Bitcoin or other cryptocurrencies is as a way of making illegal payments. It turns out it is not as difficult to track as originally promised. The FBI and other law enforcement agencies have been able to trace Bitcoin payments and use the evidence in prosecutions and to reclaim funds.

However, there is no dispute that it is more efficient than cash in making large illegal payments. Paying a $10 million ransom in hundred-dollar bills is somewhat awkward. One hundred thousand $100-dollar bills require lots of suitcases, whereas Bitcoin can do the deal with a single keystroke. But unless we have a big surge in high-dollar kidnappings, there does not look to be much of a use case for crypto.

Nonetheless, there are plenty of people throwing money into the stuff. They may find their dreams are illusory, but intermediaries, most notably the Trump family, can get rich in the process.

There have been various efforts to contain crypto, with people proposing everything from a tax on crypto transactions to an outright ban. While a crypto transactions tax is a great idea, just like a tax on all financial transactions would be great (we tax sales of food and shoes, why wouldn’t we tax sales of stocks and derivatives?), there is a better tool for reining in crypto: the market. Specifically, we should give the crypto bros what they fear most: competition in the form of a digital currency.

There was a tiny grain of truth in the argument that Bitcoin could more efficiently make some transactions, especially international ones. It had been common for banks or other intermediaries to lump together transactions so that it could take a day, or even longer. By contrast, Bitcoin trades can go through immediately.

This is less of an issue today than a decade ago, since it is more common for banks to have continuous transactions rather than do batches, but there is still an argument that Bitcoin can be faster in many cases. A digital currency could take away this advantage.

A digital currency would mean every individual and corporation would have an account with the Federal Reserve Board from which they could make payments or have deposits at zero cost. It would not only take away whatever possible advantage crypto enjoys now, it would also provide competition for banks and credit card companies. People could save tens of billions in fees and penalties by using their digital accounts rather than banks and credit cards.

This is not just hypothetical. Brazil put in place a digital payment system, called PIX, back in 2020. It is now used by the vast majority of people in Brazil to make most of their payments. We could have a similar system in the United States. After all, we aren’t that much more backward than Brazil.

This is the reason the crypto bros and the financial industry hate the idea of a digital currency. They know it is directly money out of their pockets. One of Trump’s first executive orders banned federal agencies from even studying the potential of a digital currency. Congress is in the process of passing a law prohibiting the Fed from issuing a digital currency. Members are obviously looking to provide payback for their campaign contributions from crypto bros and bankers.

A digital currency is a great example of how the market can be structured to prevent the billionaires from becoming billionaires, as an alternative to taxing away money after we let them rig the market to give it to them in the first place. Where there are services that can be provided more efficiently by the government, for example, public police and fire departments, it is pure economic waste to have them provided instead by the private sector. And this economic waste goes directly into the pockets of the rich.

The best example along the lines of a digital currency is Social Security. Its administrative costs are less than one-fortieth the cost of administering private 401(k)s or IRAs.

The arithmetic here is straightforward. The administrative cost of Social Security are less than 0.4% of annual benefits. The annual fees for a 401(k) are typically 1.0-1.5%. Some can run as high as 2.0%. If that doesn’t sound like a ratio of 40 to 1, remember the fees are charged each year.

If a typical dollar is held in an account for 20 years, this 1.0-1.5% fee will be paid twenty times. And this doesn’t even count the cost of converting a lump sum in a 401(k) into an annuity, the monthly lifelong payment people get from Social Security. That can be 5-10% of the total accumulation.

Progressives have spent an enormous amount of time developing tax schemes to take back the money we have given billionaires by allowing them to rig the market. Given the enormous inequality that has been created by these policies over the last half-century, these taxes are certainly reasonable.

But the better longer-term solution is to reverse the rigging of the market so that the rich don’t get all the money in the first place. A digital currency is a great step in this direction.

This first appeared on Dean Baker’s Beat the Press blog.

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