The Worst of Crypto Is Yet to Come

Cryptocurrency has been declared dead so many times that its supposed demise is a running joke within the industry. According to the website 99Bitcoins, the obituary of crypto’s flagship token has been written at least 477 times since 2010. A round of eulogies occurred last year, after several crypto-trading giants, including FTX, collapsed, and the Securities and Exchange Commission filed a barrage of lawsuits against major blockchain companies. “Crypto is dead in America,” said the tech investor Chamath Palihapitiya on the All-In podcast in April 2023. Publications including The Wall Street Journal and The Atlantic wondered if the technology was, once again, kaput.

So we shouldn’t be surprised that crypto is back. What’s shocking is just how back it is. The total market capitalization of crypto assets this year has been within striking distance of its all-time highs in 2021. The crypto sector has been the biggest political donor in the current election cycle, surpassing even the fossil-fuel industry, with contributions flowing to candidates from both parties. In May, the House of Representatives passed a bill that included many of the policy demands of crypto lobbyists, while the Senate rolled back guidelines by the SEC designed to protect consumers of cryptocurrencies. And both presidential candidates have flirted with crypto enough that, no matter who wins in November, the market could be on the brink of a deregulation-fueled bonanza.

How did crypto bounce back so fast? Part of the answer is pure smashmouth politics: The industry started spending gobs of money—at least $130 million to date—to elbow its way into this year’s congressional races. It has also refined its sales pitch. Since the FTX meltdown, the industry has been making efforts to distance itself from the Sam Bankman-Fried school of charm. Gone are the mussed hair and grandiose talk of altruism and saving humanity. In are the MBAs and lawyers, the Ivy Leaguers who know how to speak the language of Washington persuasion. The industry’s message now: Make crypto normal. Regulate us, please. All we want is to know the rules of the road. They highlight the most mundane, inoffensive applications of crypto, while condemning the scammers who tarnish the industry’s reputation and avoiding mention of the “degens,” or degenerate gamblers, who represent much of crypto’s actual demand.

[Annie Lowrey: When the Bitcoin scammers came for me]

But the truth is that the scammers are only getting bolder, finding new creative ways to rip off retail investors. Should the crypto lobby get its way, the new regulatory regime will clear a path not just for the industry’s “respectable” wing but also for the wildcatters and criminals. If you thought crypto was a problem before, you should be alarmed. The worst is likely yet to come.

The crypto industry insists that its goal—the reason it’s spending ungodly sums of money to sway elections—is to be boring. Nothing to see here. Crypto companies say they merely seek “regulatory clarity.”

This phrase is, to be generous, a sleight of hand. Companies don’t just want clarity; they want a particular set of rules. Currently, crypto exists in a state of regulatory limbo. The SEC says that most crypto assets are securities, defined as an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” The paradigmatic case is a share of stock in a publicly traded company. Securities are subject to a lot of rules: You can only trade them through a registered exchange, and issuers have to disclose a bunch of information about the underlying companies. That way, investors can make informed decisions about which securities to buy and which to avoid.

If digital assets are indeed securities—a position that some federal judges have accepted, at least one judge has questioned, and is currently being tested in a number of ongoing enforcement cases—then crypto operations would have to behave like other Wall Street institutions. Companies like Coinbase, for example, would need to separate their brokerage services—that is, helping their customers buy and sell tokens—from their exchange services. (This is one aspect of the SEC’s pending lawsuit against Coinbase.) Plus, crypto operations could no longer launch overnight—not legally, at least. They’d have to register with the SEC and issue thorough disclosure documents before allowing the public to invest, a burdensome and costly process that would weed out a huge share of dodgy crypto schemes with no sound business model.

The main plank of crypto’s bid for normalcy is that tokens should be considered commodities, not securities. What could be more boring than a commodity? Wheat, orange juice, coffee beans, livestock: Commodities are interchangeable, and you can trade them with other people directly. The crypto lobby says tokens are clearly commodities, since they’re fungible like bags of corn and do more than just go up and down in price. For example, users can spend tokens as “gas” to interact with a blockchain or participate in the governance and upkeep of the blockchain; they don’t merely rely on “the efforts of others.” (The SEC agrees that bitcoin is a commodity, since unlike almost every other crypto asset it has no central issuer.)

Classifying cryptocurrencies as commodities would bring them under the purview of the Commodity Futures Trading Commission, rather than the SEC. The CFTC has been friendlier to crypto, going so far as to advocate for controversial deregulatory measures pushed by FTX. It’s also much smaller, with roughly one-sixth the budget and staff. With the CFTC in charge, the SEC’s long list of pending cases would disappear, and we’d probably see a lot fewer prosecutions of crypto companies.

Consumer advocates argue that exempting crypto from securities laws would make it easier for Americans to buy risky digital assets: Not only would exchanges like Coinbase and Kraken be likely to offer fringier coins—they’d be harmless commodities, after all—institutional investors like pension funds might see the new rules as a stamp of approval to dive into crypto. Hilary J. Allen, a law professor at American University who studies financial regulation, told me that designating cryptocurrencies as commodities would create a loophole that non-crypto companies could exploit. “Slap a blockchain on it,” she said, “and you too can be free from securities regulation.” Dennis Kelleher, the CEO of the nonprofit Better Markets, told me the real reason the crypto industry doesn’t want tokens to be classified as securities is that disclosure rules would expose them as financially dangerous. “If you had to fully and truthfully disclose the risks associated with crypto, the people who would engage in crypto would be near none,” he said.   

The industry deflects such arguments by downplaying its chaotic history and focusing on its more mundane use cases: stablecoins, for example, which are designed to maintain a fixed value and can be used for instantaneous peer-to-peer transactions, particularly cross-border remittances, and as a hedge against inflation. (Argentina has seen growing adoption lately.) Or, even more boring, “decentralized physical infrastructure networks,” or DePIN, which employ blockchain technology to reward users for providing public resources such as data storage or Wi-Fi.

But the rules the industry is pushing would also juice some of crypto’s most degenerate schemes. The breakout hits of 2024 are fundamentally just new ways to gamble. Polymarket, the platform where wagers are made exclusively with crypto, has taken off this year thanks to interest in betting on the election. “Tap-to-earn” games such as Hamster Kombat have surged in popularity, luring users with rewards in the form of tokens. The apotheosis of speculative crypto insanity, though, is the website Pump.fun. On Pump.fun, anyone can create a memecoin instantly—all you need to do is select a name and an image—and the site creates a market where people can buy and sell it. One recent top token was named after the internet-famous baby hippo Moo Deng. Inevitably, creators are going to absurd lengths to promote their tokens: One guy posted a photo of himself apparently using meth. Another suffered burns after shooting fireworks at himself during a livestream.

The industry doesn’t foreground these casino-like use cases, but it implicitly blesses them. Speculation is normal, advocates say. In fact, it’s what drives innovation in the first place. “Speculation, taking risks—that’s what fuels the economy,” Kristin Smith, CEO of the Blockchain Association, told me. Sheila Warren, CEO of the Crypto Council for Innovation, says that allowing people to buy and sell tokens isn’t about whether crypto is good or bad. “I don’t necessarily know that it’s net positive or negative,” she told me. “I think it’s about the ability of people to determine what they want to do with their own money.”

The biggest degen of all is on the ballot. Donald Trump clearly has no idea what a blockchain is, but he understands that it’s related to money, which seems to be enough. He has declared himself “the crypto president.” In July, speaking at a bitcoin conference in Nashville, he pledged to make the United States “the crypto capital of the planet” and called crypto “the steel industry of a hundred years ago.” In September, he stopped by a bitcoin-themed bar in New York City and spent $950 worth of bitcoin on a round of burgers and Diet Cokes. Trump has also announced his involvement in a new crypto platform called World Liberty Financial. While the details of the project are hazy, it would apparently offer a stablecoin. (The project’s launch last week saw low demand and extended outages.)

[Read: The Trump sons really love crypto]

The industry is salivating at the prospect of a Trump win. Trump has said he would fire SEC Chairman Gary Gensler, create a “strategic national bitcoin stockpile,” and free the American cybercriminal and crypto hero Ross Ulbricht from prison. Any Trump-affiliated crypto project, such as World Liberty Financial, would operate in a legal gray area unless Congress passed the new regulatory regime the industry is asking for. In other words, he has skin in the game. “It’s clear Trump would be very positive for crypto,” Smith, the Blockchain Association CEO, said.

How a Kamala Harris administration would regulate the technology is less clear, but her recent statements have given crypto fans hope. In September, she promised to help grow “innovative technologies” including “digital assets.” Then she announced that she would support regulations that enable “Black men who hold digital assets to benefit from financial innovation” while keeping those investors “protected”—a strange and careful framing that implicitly acknowledged how many Black men have lost money on crypto. These comments could just be campaign rhetoric meant to fend off attacks by the crypto lobby. But they show that Harris is listening to the industry’s arguments, particularly those couched in the language of opportunity and equity. Harris is, if nothing else, sensitive to the direction of political winds. If a newly crypto-friendly Congress were to pass the industry’s desired legislation in a bipartisan way, a President Harris might feel great pressure to sign it.

And even if Trump and Harris do nothing to help crypto, the technology has by now proved its indestructibility. As if to drive home the point, 99Bitcoin’s obituary tracker seems to have dropped off this year. The last entry is from April. I messaged the site’s owner to ask if he was still updating it. He didn’t respond.