Minister of Glass Houses: Steve Mnuchin’s Ironic ‘Concerns’ About Cryptocurrencies
“I will focus primarily on the serious concerns the Treasury has about the growing misuse of virtual currencies by money launderers, terrorist financiers, and other bad entities.”
For those that haven't been paying attention to the recent opinions of key members of the Trump Administration. The President himself took to Twitter last week to outline the sudden U-turn on cryptocurrencies and digital assets he has had recently.
But now, with the beginning of this week: following on from the speaking up from economists and other ‘old-guard' financial analysts, the US Secretary of the Treasury, and former VP of Goldman Sachs and Dune Capital Management – Steven Mnuchin – held a press conference to ‘explain' the recent Trumpish outburst against cryptocurrencies.
It's worth pointing out Mnuchin's previous professional history, so as to illustrate the kind of marionette strings potentially involved in this conference. More specifically, the opinions of Trump, his administration and financial experts come in the wake of Facebook's Cryptocurrency – Libra – which will be attending meetings at Capitol Hill with Congress.
While the prospect of Facebook being grilled (again) is, in itself, a pleasant kind of Schadenfreude for those that were as horrified as we were about its privacy failings. The scrutiny will likely put a theoretical wrench in the works of Libra's timeline, consequently hitting the value of crypto-assets.
But greater care should be taken for understanding the kind of misplaced thinking of the Trump administration in this press conference and Mnuchin's statements.
The concern expressed by Congress and the US Treasury is the potential that Libra has of being maliciously used by entities to participate in illegal activities such as money laundering. While Congress and its representatives have a right to feel concern over this. It's a misplaced feeling which can be explained (at least) three-fold.
Firstly – Congress Seems to Struggle to Understand Facebook, let alone Cryptocurrencies
There's a reason that Reddit, Facebook and, sadly – Instagram, consisted of a wide variety of memes related to the collective technological illiteracy of Congressional Representatives during the Zuckerberg hearing last year.
Questions raised by the likes of Rep. Orin Hatch, who tried (and failed) to comprehend Facebook's underlying business model are a testament to the question we should be asking political representatives – are they actually up to the task of judging something they have clearly proven they lack the literacy or basic understanding of?
Secondly – Facebook is so compliant that it throws its Crypto status into question
Not only is Facebook Libra operating in accordance with Anti-Money Laundering policies, Know Your Customer (KYC) regulations but also Bank Secrecy policies, which not only provide it with the means to effectively combat mal-practice from users, but to do so in such a way as to throw its status as a cryptocurrency into question as a result.
And Third – It's not that Mnuchin's concerns are unfounded, just that they're ridiculously misplaced
According to studies conducted during February 2018, more than 46 percent of transactions with Bitcoin consisted of (broadly) illegal activities ranging from money laundering, crypto tumbling, weapons, drugs and child trafficking.
This amounts to roughly $74-76 billion over these few years. The problem with this is that they are wholly out of date compared to more recent studies conducted by Bloomberg and Chainalysis, which demonstrates that only 1 percent of transactions within Bitcoin is considered illegal.
Compare this to mainstream financial institutions, banks, etc – and the latter is guilty of more than $2 trillion worth of illegal activity on an annual basis (according to the UN), and are actually subjected to stringent regulations.
Some of the Concerns
“We will not allow these Crypto exchanges to operate in the shadows.”
Specifically, speaking on behalf of the US Treasury, Mnuchin discussed the pre-requisites placed on financial institutions and exchanges; that they need to adhere to Anti-Money Laundering and KYC regulations.
“Cryptocurrency exchanges must comply with Anti-Money Laundering regulations and collaborate with the Financial Crimes Enforcement Network.”
While it smacks of a particular kind of ‘pot, kettle, black' mentality, there is a logic to this demand from the US Treasury for crypto exchanges to adhere to AML / KYC policies.
While the sort of freedom that decentralized, unregulated exchanges provide Crypto traders makes them a relative no-brainer to those looking to ensure their anonymity is safeguarded. There is still the issue of personal financial security should anything go wrong.
We have seen cautionary tales of that in the not too distant past, crypto exchanges that go without money laundering policies have been subjected to exit scams perpetrated by fraudulent ICOs or even just poor security in light of no strong framework being in place. We've seen this with exchanges like Mt.Gox, which culminated in a staggering loss for traders in general, with assets that are still being fought over by US legal firms.
But it can't be all crypto exchanges that go without regulation, right? Completely true, there are a growing number of exchanges out there that do adhere to KYC/AML policies. The only problem is that these tend to be a staggering minority of exchanges. According to CoinFirm back in March this year – only 14 percent of them internationally, in fact.
While coming from a place of (relative) reason, this hasn't stopped the secretary from making some incendiary comments, such as declaring that Bitcoin's value appears ‘out of thin air.' A statement which, again, comes off as if said by the landlord of a glass house set to throw a brick.
With these concerns in mind, it's not without reason that the Treasury Secretary expresses concern for crypto-assets. In fact, this does seem to have inspired the creation of a Financial stability Oversights Committee on digital assets, according to Mnuchin.
The end goal? Is it to create a more globalized approach towards regulation? The kind of collaboration that Mnuchin refers to involves some pretty major financial powers, such as heads of the European Union.
“We have had extensive work at G20, and will be addressing this at the G7 global financial ministers in France… To be clear, the US welcomes responsible innovation, including new technologies that may improve the efficiency of the financial system and expands access to financial systems.”
When it's put like this, Mnuchin makes it seem that the US is operating in a wholly altruistic capacity – looking out for end-users in the creation of a robust framework in order to ensure security when trading any of these crypto assets.
There is certainly a long, thick vein that does show itself, however, reminding us that the US has a lot to gain from being the adjudicator of regulations for crypto assets. And a lot to lose in terms of its own financial hegemony were it to be placated by a more democratized challenger.
“The US Treasury takes very seriously the role of safeguarding the US Dollar as the world's reserve currency. And we will continue our efforts to protect our country and the US and World's financial system.”