Why the government hates cryptocurrency RealClear Politics

The Chinese government recently declared cryptocurrency illegal. In Washington, policymakers have questioned its legitimacy and legitimacy. Sen. Elizabeth Warren called cryptocurrency “the fourth-rate alternative to real currency.” At the time of writing, the president is reportedly working on an executive order to crack down on crypto.

But why? To answer, it is best to start with a question. How many dollars do you have? Before you go to dig your pockets, I save you trouble.

The answer is zero. You have no dollars.

Green slips of paper (actually, cotton and linen) are commonly referred to as “dollars” in practice Federal Reserve notes. A “note” is a type of negotiable instrument that carries the promise that its owner (holder) will be able to redeem it for the person (issuer) who promised it.

The Federal Reserve notes are not dollars; They promise to pay their holder but the bill marks many dollars.

When the Federal Reserve Act became law in 1913, at least that’s what it was supposed to do. At that time, Congress created a central bank aimed at ensuring a stable money supply. Congress has given it the power to issue promissory notes that, according to the law, “can be redeemed in gold at the request of the U.S. Treasury Department.”

There was nothing significant about this. Back in the Coinage Act of 1792, the dollar was defined as a certain amount of precious metal – basically silver, which in 1890 was exclusively converted to gold.

But in 1933 President Roosevelt issued an executive order requiring U.S. citizens to transfer “all gold coins, gold bullions and gold certificates” to the Federal Reserve and its member banks. Shortly afterwards, Congress passed a law barring the Treasury from recovering gold notes. Because private ownership of gold was now illegal, the link between gold and the Federal Reserve note was largely theoretical.

Although the Bretton-Woods Treaty of 1944 restored the power of foreign governments to convert their notes into gold, President Nixon abolished that practice in 1971. Thus ends any connection between the dollar and the precious metal.

Currently, Federal Reserve notes can be redeemed for “legitimate money”. A different provision of federal law states that “legal tender for all debts, public charges, taxes, and arrears of U.S. currency and currency (including Federal Reserve notes and circulation notes of the Federal Reserve Bank and national banks).”

Which means that if someone goes to the U.S. Treasury to break up Federal Reserve notes, one will receive an equal amount of Federal Reserve notes and some currency. Although the Treasury Department has the legal authority to mint dollar coins, they are defined by their size and do not require any precious metals. No dollar currency has been created for general circulation for over a decade, and now the “dollar” basically exists as a speculative unit of account.

This evolution of the dollar from a certain amount of precious metal to the accounting unit has largely occurred without public debate. The conversion means the American national currency, which was previously based on scarcity (limited supply of gold and silver), is now based solely on human will to use it as a means of exchange. This makes the dollar a fiat currency.

Fiat currency is useful. Among other things, they allow central banks to engage in “quantitative easing” by borrowing (by issuing notes) that do not actually exist and therefore never have to repay (dollars in the case of the Federal Reserve).

America is hardly unique in this respect; The most developed national economy has fiat currency. Although the phenomenon is widespread, it is a fairly recent development.

And that includes many in Washington (as well as governments in other countries) who don’t like crypto. The most widely used cryptocurrency, Bitcoin, is limited to 21 million tokens. Other digital tokens, such as ether, have a set (or at least predictable) rate of return. By returning to a deficit-based financial system, crypto has the potential to gain user confidence at the expense of Fiat currency. Stablecoin, like Facebook’s proposed DIEM, frightens central bankers the most.

Stablecoin is a cryptocurrency supported by real assets. These resources could be dollars, gold, oil or anything else. Stablecoin offers holders a currency redemption for something that is as limited as possible, effectively restoring the value of the precious-metal that is used under the money issued by the government.

This recovery of the connection between currency and scarce or real assets creates competition for official notes that can be printed without limits. Also, cryptocurrencies can be used over the Internet without the intervention of banks, which usually have exclusive rights over government money transactions. This makes it more difficult for authorities to track.

Cryptocurrency and decentralized money pose a threat to the confidence-based financial system of the modern world. There are three main ways governments can respond: tolerate cryptocurrencies by trying to fit existing regulatory schemes; Develop government-backed alternatives (which many central banks are actively considering); Or prohibiting the use of cryptocurrency is costly or completely illegal.

China has made its choice. Policymakers in the United States are currently considering which approach to take. Whatever they decide will have significant consequences. Hopefully, this year’s debate will see more publicity than a conversion from dollar to zero based on gold.

Gregory Jarzan is a partner at law firm Jordan Ramis PC. He previously served as Acting Assistant Secretary of the Treasury under President George W. Bush.

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