Could Washington Successfully Suppress Cryptocurrency?

Is the US Federal Government Truly Relevant to the Future of the Crypto Industry?

Feds Running Scared

Our previous article detailed our evaluation of Facebook’s Libra currency proposal. We see it as both providing some validation for our own project, as well as an opportunity to make our own Lyra much better than Libra ever could be. The US government wasn’t far behind in offering its own opinions, which amount to the kind of threats issued by bullies who are frightened their dominance is being challenged. Treasury Secretary Stephen Mnuchin held a crypto-fearmongering press conference, calling cryptos “a national security issue.” The G7 finance ministers echoed this sentiment. Federal Reserve Chairman Jerome Powell recently told lawmakers on Capitol Hill that Facebook’s plan for Libra could not move forward unless it addressed concerns over privacy, money laundering, consumer protection, and financial stability. President Donald Trump indulged in a tweet storm denouncing Bitcoin and cryptos generally, reiterating the tired canards about their facilitating illegal activity (as if fiat currency doesn’t?), while dissing Libra and claiming that Facebook would need a banking charter to proceed with it. Legislation was even introduced in the US House of Representatives to bar big tech companies from functioning as financial institutions or issuing digital currencies.

No King At All?

President Trump, as usual anything but shy about revealing the government’s motivations, made them perfectly clear:

“We have only one real currency in the USA, and it is stronger than ever, both dependable and reliable. It is by far the most dominant currency anywhere in the World, and it will always stay that way. It is called the United States Dollar!”

Which puts us in mind of something Tywin Lannister said to his grandson, King Joffrey Baratheon, in : “Any man who must say ‘I am the king,’ is no true king.” The status of the US Dollar as the world’s reserve currency is after all the cornerstone on which the American Empire is built, and there would appear little reason to take such actions or make such grand pronouncements if the imperial government didn’t feel that the dollar’s dominance was potentially threatened by cryptocurrencies — especially by one with a consortium of billion-dollar companies behind it.

Never mind for the moment that the proposed bill will likely never pass. Indeed bill concerning the cryptocurrency industry would need bipartisan support in order to get passed; and given that the Congress appears to spend much of its time these days trying to censor each other’s unacceptable utterances along party-line votes, the odds of any substantive bill (on almost any subject) getting passed before the 2020 elections now seems quite remote. We’ll disregard too that the tech ban bill as proposed may amount to an unconstitutional bill of attainder (that is, a law aimed specifically at a particular party rather than being of generic application). Despite all of this, let’s suppose that the US federal government finally becomes sufficiently frightened of the threat to the dollar posed by Bitcoin, or Libra, or anything else, to cause it to pass legislation forbidding or severely restricting the issuance or operation of cryptocurrencies generally. And then let’s examine the truly important question: ?

The World to Washington: Pound Sand!

The idea of Nullification has been around for a very long time. Not only does the concept underlie the 10th Amendment to the US Constitution, but the principles of nullification were further developed by Thomas Jefferson and James Madison in the Kentucky and Virginia Resolutions of 1798. According to these principles the states have not only the right but the duty to prevent federal overreach by blocking or ignoring unconstitutional acts. Under the enumerated powers doctrine, the vast majority of what the federal government does, were it truly of general application, is pretty obviously unconstitutional. (Except that often it generally applicable, as we’ll see below.) In recent years this concept has become more than just an obscure academic principle or a curious historical opinion. Nullification involves acts which render a particular federal law or program null and void under the law, or (more likely) . Let’s look into some contemporary examples:

  • Drug laws: recreational marijuana is now legal in 11 US states plus DC, while marijuana is legal in some form (usually for medical purposes) in 33 states. Yet according to federal law, marijuana remains a Schedule 1 controlled substance with no medical value. Perhaps out of a desire to forestall a head-on collision between nullification and the Constitution’s supremacy clause, Congress has enacted and extended the Rohrabacher-Blumenauer amendment, which prohibits the use of federal funds to prosecute medical marijuana violations in states where such use is legal. That amendment however says nothing about using federal funds to prosecute recreational use. Nevertheless, doing so would seem to be a waste of time. Without the cooperation of local law enforcement, DEA resources would be overstretched. Not to mention the difficulty of getting a jury to vote unanimously for conviction in a state where anyone not living under a rock would know the defendant wasn’t breaking local law. Naturally not a single one of these 33 states asked Washington’s permission before enacting their own nullifying laws.
  • Concealed carry without a permit: once called “Vermont carry” because until 2003 Vermont was the only state which allowed it, as of 2017, 14 states now permit unrestricted concealed carry of weapons, i.e. without a government permit. While there are no federal laws on the subject of concealed carry, the no-permit system certainly flies in the face of the spirit if not the letter of federal firearms laws, which are plainly meant to disarm as many people as possible. Again, no permission was asked. Moreover a number of states and counties within some states have boldly declared themselves to be “sanctuaries” against federal gun control edicts perceived as unconstitutional.
  • Immigration laws and deportations: news reports have been abundant recently concerning cities (like New York), states (like California), and counties likewise declaring themselves to be “sanctuaries” against the enforcement of federal immigration laws. The fact that the enforcement of laws against hiring illegals is practically nonexistent anyway, suggests this is largely political theatrics. Total non-cooperation with ICE (the responsible federal agency) has included not merely preventing local law enforcement from going along on raids, but cutting ICE off from access to police and other state database records. Federal agents frequently rely on such local cooperation to locate and apprehend suspects.
  • Sidebar: in fact, legally they’re required to do so. Federal agents do not technically have arrest authority outside of federal territory. In order to make an arrest, they must submit their arrest warrant to a county sheriff or a municipal police captain, who would then assign officers to accompany the agents to make their arrest per the federal warrant. This was actually taught in law schools and police academies as late as the 1960s. Unfortunately, over the past 50 years various bills granting federal monies to states for highways, schools, and other purposes, made the states agree implicitly, as a condition of accepting the funding, that federal officers would thereafter have tacit to arrest whom they would in that state without any formal request procedures. In other words, the feds bought the right to make an end run around local law enforcement, which as a rule is far more accountable to the public. But any state willing to forgo certain federal funding could easily revoke its tacit consent to the arrest authority of federal agents on its soil. Conceivably, such a state’s governor could even give all nonresident federal agents 24 hours to apply for permission to remain in the state! Removing automatic arrest authority from federal agents would make enforcing federal law essentially impossible wherever local law enforcement wasn’t on board. (This is one of the main reasons why Prohibition agents had such a hard time enforcing the Volstead Act in cities like Chicago, New York, and Atlantic City where the local cops were often aligned with the bootleggers.)
  • Abortion laws: about a dozen states have recently enacted anti-abortion laws so restrictive that they would almost certainly be challenged and struck down under Roe v. Wade. That of course is the whole point. The states are hoping that the next SCOTUS case results in overturning Roe, while in the meantime their new law will stand. (But the Court, be it noted, does not like to overturn precedents dating back more than 40 years.)
  • Cryptocurrency laws: while the feds have not yet enacted any, a number of states have gotten out in front of this. States such as Pennsylvania and Colorado have done so by way of electing not to make money transmitter licenses required for most crypto businesses. But the most interesting by far is Wyoming, which appears determined to make itself America’s answer to Crypto-Valley in Zug, Switzerland. Should the feds ever enact their own crypto legislation, very likely it will put state law in proactive states like these at odds with supposedly supreme federal law, just like with drugs, guns, immigration, and abortion.
  • Drone regulations: the FAA (Federal Aviation Administration) recently did for UAVs what many people seem to expect the SEC to do for cryptos: enact a bunch of new rules without authorization by Congress, which in the case of the FAA’s UAV rules actually contradict existing legislation that carves out exceptions for hobbyists and model aircraft. According to the FAA, all UAVs, including remote control model planes, now require a drone pilot’s license from the FAA to operate lawfully. Trouble is, the FAA has only a handful of agents in most states, and they are already busy with the affairs of airports and airlines. So the FAA told local sheriffs they would be responsible for enforcing the new rules on drones. The sheriffs associations told them to drop dead, they’re not spending their budgets on behalf of the FAA. Result: people are now “breaking the law” all over the country, but enforcement is absent or impossible.
  • International affairs: as abundant as domestic defiance of Washington is today, the international defiance is even more visible. NATO ally Turkey recently bought Russian S-400 missile defense systems, despite being ordered not to. India is likewise considering the S-400, and may even join the SCO. Italy was instructed not to sign onto China’s Belt And Road Initiative, but did so anyway. The EU recently activated a mechanism called Instex aimed at facilitating ongoing trade with Iran by avoiding the use of the dollar and bypassing SWIFT. Russia just expressed a desire to join Instex, and China may follow. While it’s unclear how effective Instex will be, the point is that the EU was told in no uncertain terms not to go through with it, even to the point of being threatened with sanctions. Yet they activated it anyway. Russia and China have both developed their own internal replacements for the SWIFT international bank wire system controlled by the US, in case the US should expel them from SWIFT as it has Iran. (Incidentally, the US actually had to threaten SWIFT itself with sanctions in order to get Iran kicked out!) Nations like Syria, Cuba, Mexico, Iran, and the DPRK have defied the US on one issue or another for years. Iraq, despite being a US client state, recently voted on whether to expel US forces from their country. (Not that they could enforce that, of course.) Venezuela, even in its severely weakened condition, managed to stave off a recent color-revolution style coup attempt by Washington, as did Turkey several years ago. Ukraine was not so lucky in 2014, but Crimea without doubt is going to remain with Russia, where it’s been since Catherine the Great purchased it before the United States even existed. The Trump administration ran its vaunted Palestinian peace plan up the flagpole, but only Israel saluted. Washington yells and screams and stomps its feet, but outside of the Anglosphere hardly anyone seems to be listening anymore. They mostly just roll their eyes, and sometimes they even laugh.

We could go on, but the bottom line is clear: the entire world, foreign and domestic, is sick and tired of the Empire and the self-serving diktats emanating from its festering capital. Trump, for all his obvious faults, at least does everyone the courtesy of sounding like exactly what he is: the swaggering titular head of a vast international organized crime syndicate masquerading as a government, the godfather-in-chief. Pretty much everything you need to know about official Washington can be gleaned just from the Jeffrey Epstein case. Washington isn’t a swamp, it’s a crime scene.

But What About Existing Law?

Even if no new federal laws are made, what about enforcing existing laws regarding securities, commodities, or virtual currencies? Couldn’t agencies such as the SEC, the CFTC, and FinCEN conduct a federal war on crypto just using existing statutes and rules? The short answer is “not very well, no.” But let’s dive into some details.

Potential Impact of Securities Laws

The SEC, an agency which exists to enforce the cartelization of the financial sector, would plainly love to see as many cryptos as possible defined as securities and thus lassoed back into the cartel’s corral, and have said as much themselves publicly. The fundamental problem they face is that the actual definition of a “security” in US law is as follows:

Here’s the problem: this definition is written using the word “means,” not the word “includes.” Therefore the list is complete. Those things found on the list are securities, while all things not on the list are not securities. Therefore, to show a crypto coin or token is a security, the SEC would have to prove that the coin or token is to something found on the list, such as an investment contract for example. Proving that would involve two steps: 1) show that the token possesses all the properties of an investment contract; and 2) show that the token possesses no unique properties which would distinguish it from an investment contract. In order for ‘a’ to equal ‘b’, ‘b’ must also equal ‘a’. Crypto coins or tokens not shared by of the financial instruments listed. For example, they can be traded P2P on a global computer network without an intermediary, with the trades recorded in a distributed ledger. This simple fact alone would prevent ‘b’ from equaling ‘a’, even if it could be shown that an ‘a’ was otherwise an instance of a ‘b’.

The SEC can only issue guidance, not law. Pursuant to that guidance, it can then “deem” that some particular token is a security. (The word “deem” is used to suggest that some deep, meticulous, solemn cognitive process was performed to make this determination, but in reality it’s just a fancy way of presenting the opinion of someone who works there.) It’s conceivable that they could also succeed in convincing a federal court to agree with them, in the context of the facts and circumstances surrounding some particular case. But in that case. Courts likewise cannot add “cryptocurrencies” or “ICO tokens” or anything else to the securities list. Only Congress can do that.

The SEC has evidently determined to essay the court route by suing Kik over its Kin token. A worthwhile analysis by Andreessen Horowitz of what’s going on with this case can be found here. (And if you’d like to help Kik in its efforts to fight the SEC, see here.) It seems certain that this case will generate no meaningful precedents until it gets adjudicated at the appellate level, a process which will take years. From our point of view, Kik made things quite a bit harder for themselves both by executing a SAFT (a token offering structure which contemplates the future delivery of securities), and by meekly cooperating with the SEC when they came calling with an administrative subpoena.

When the camel arrives wanting to poke his obnoxious nose into your tent, why give him a whiff of any information that might make him want to poke his nose in further? Better to whack him on the snoot and hopefully make him go away. A strategy for doing this was explained in some detail last October by one of our colleagues at SilentVault. Basically the strategy amounts to demanding that the SEC prove in court its jurisdiction over your activities in order to enforce its subpoena. This is logically much harder for the SEC to accomplish it has any detailed information on your activities. In fact, not wishing to lose at the motion hearing for lack of evidence of jurisdiction, it’s rather likely that they wouldn’t motion for contempt in the first place! Never concede a single inch of ground to a hostile agency without a fight, and always assume that agencies are hostile. (And yes, we do take our own advice on that point!)

Potential Impact of Money and Banking Laws

While the SEC thinks cryptos are securities, the CFTC thinks they’re commodities, the IRS thinks they’re taxable property, and FinCEN thinks they’re virtual currencies. (Gee, what a !) Of course they can’t all be right, so which ones are wrong? Perhaps all of them?

Last May, FinCEN issued summary guidance on the application of the (Orwellian) Bank Secrecy Act’s requirements about money transmission, detailing circumstances in which cryptos, wallets, exchanges, miners, and even developers and DApps might get classified as a money service business (MSB). You can access a version of this document very charmingly annotated by attorney Katherine Wu, here.

What even attorneys often miss in reading this sort of material are situations where terms do not mean what they appear to mean, owing to specific custom definitions found in the law which are different from the common meaning in ordinary language. In the case of this FinCEN guidance, the phrase “engaged as a business,” and variations on it, occur some 17 times. This is hardly an accident. In law, terms are precisely defined and then used with deliberate care. So it behooves us to examine the definition found anywhere in federal law of the term “trade or business.” What is this thing called business which one may be engaged in, whether or not as an organized business entity, domestic or foreign? This definition is found at 26 USC § 7701:

(Yes, that’s the complete definition.) This definition is not restricted to Title 26 (Income Taxes), by using words like “for purposes of this section.” Thus it applies globally throughout the corpus of US Code, unless overridden by a superseding definition somewhere else. Title 31 provides no such local definition, so it applies there too. (In fact, a search shows that the definition supplied in Title 26 is the only one.) By the rules of statutory construction (known to any first year law student), the use of “includes” in a definition means that any illustrative list supplied need not be exhaustive, that nothing of a character discernably different from the sample items present on the list may be deemed to be included.

In this case, we have a very short list of length one. You are engaged in trade or business if (and only if) you are in some way assisting in the performance of a public office. Nothing is said about buying and selling with intent to make a profit (what’s normally meant by “trade”), or about providing goods and services to customers generally (what’s normally meant by “business”). Since these commonly understood activities go unmentioned and yet are distinctly different from the functions of a public office, they are therefore !

Note the language does not say “perform a public office,” but “perform the functions” of a public office. So clearly one doesn’t literally have to work for the federal government to meet the definition. Fine, so how someone in the private sector perform the functions of a (federal) public office? Why, by getting a federal MSB license, or a federal bank charter, or a security dealer’s license, or a license from the FCC, the FAA, the DOT, or the like, of course. How else? Once operating under such a license, you become an adjunct of the federal office which issued it, and you must follow certain procedures, file certain reports, etc., thereby helping that agency to implement public policy. Once you are “engaged in business” with the permission of Washington, you must then follow all their rules. But otherwise, the rules do not apply to you, and FinCEN, as an administrator of such rules, has no inherent jurisdiction over you. So we see here the spectacle of a government agency attempting to frighten the uninformed into rendering themselves subject to its authority by registering as MSBs. After doing this, they actually be legally subject to FinCEN’s authority as an MSB! Appalling, yet par for the course.

On the plus side, federal law has actually been written very carefully to avoid overstepping the constitutional authority of the federal government. This is done precisely so that laws can survive court challenges, as when the Affordable Care Act (aka “Obamacare”) was upheld by the Supreme Court. Many like to bleat that the federal government is doing all kinds of unconstitutional things and extending its reach far beyond the scope of its delegated authority, even to asserting claims of extra-territoriality. But in fact, most federal law applies only to those making money by the grace of Washington; who, in exchange for the opportunity to earn privileged income, owe excise taxes on that privileged income (known as “federal income” tax), as well as obedience to a vast pile of rules and regulations. Technically, no attempt is actually made by the feds to assert legal authority over (or even to collect taxes on) any activities or earnings! This is done precisely to prevent constitutional challenges, which could result in entire government agencies and code titles getting ruled null and void. They’re not at all unconstitutional, because their scope is limited.

This is not an article about taxes, and we do not give tax advice. But are we saying that the same factors which create liability for federal income tax also make one subject to numerous federal laws such as those enforced by FinCEN, and vice versa? Yes! (Ponder this subtle distinction: it’s not a direct federal “income tax,” it’s an indirect “federal income” excise tax.) However attempt is made to hoodwink businesses and entrepreneurs into volunteering to participate in “the performance of the functions of a public office,” and likewise to induce private sector citizen workers to volunteer to become “employees” earning “wages.” Understand this point and seemingly bizarre episodes like this one at a Congressional hearing will no longer confuse you. And the ACA ruling will make perfect sense.

Conclusions

Cryptocurrency is here to stay. Growing #resistance to Washington, both within and without the United States, would also appear to be here to stay. Indeed, just like the crypto industry, that resistance is palpably growing. The authorities in the US, in the EU, in Russia, China, Iran, India, and many other countries, are increasingly concerned that their monopoly control over the issuance and transfer of money may be under threat of erosion and eventual extinction. Since that monopoly is the main basis of their power, their concern is understandable. Defensive anti-crypto laws may soon be enacted in many places. In the US however, constitutional considerations will necessarily limit the scope of those laws to the sphere of federally connected activity. Effective nullification by states with contrary laws may occur, as with existing laws on other subjects. nullification due to enforcement difficulties may also arise, caused by lack of resources, or lack of local cooperation.

Facebook may very well be prevented from launching Libra due to rulers’ fears, or else forced to submit to government oversight, e.g. by getting a banking license and joining the Federal Reserve System. Facebook, and the other founding members of the Libra Association, are already engaging in “trade or business” and earning privileged income, and thus are subject to all federal laws and regulations. (Or at the least, they have into that jurisdiction by paying corporate “federal income” taxes.) Not to mention they have large expensive office buildings where thugs can show up and kick down doors. They will have to comply.

The broader crypto industry however, does not. It will remain possible to utilize jurisdictional arbitrage, decentralization, encryption, and anonymization techniques to build a thriving alternative economy beyond the reach (and largely even beyond the notice) of the corrupt establishment. Projects like Ascension’s Lyra can succeed where Facebook’s Libra will not, simply because ours is crypto-based not fiat-based. And peacefully building such a parallel economy is the way to address the manifest injustice and corruption of the existing economic and political order.

We’ll leave you with a profound thought from a deep thinking historian: — Bill Buppert, ZeroGov

This is the blog of the Ascension cryptocurrency project.

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