The Politics of Bitcoin

The financial system is sensitive to political forces, and cryptocurrency is no different

By Ivory Johnson, CFP®, ChFC – September 2024

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Ivory Johnson, CFP®, ChFC, is the founder of Delancey Wealth Management, LLC (www.delanceywealth.com). Mr. Johnson has a B.S. in finance from Penn State University, has been certified by the Digital Asset Council for Financial Professionals, and is a member of the CNBC Financial Advisor Council.

Statements are opinions and not guarantees. Investments mentioned have potential risks and uncertainties.

We are taught to avoid any discussion of politics or religion at the workplace, but truth be told, we pray for stock markets made robust by central banking policies and legislative agendas. It is quite a leap of faith to expect elected officials to spend seven figures for the privilege of representing their constituents when many of their constituents don’t have seven figures.

Every four years, Americans are tasked with choosing a new commander in chief. It is an imperfect process advertised as the straw that stirs the legislative drink on Capitol Hill. The Great Financial Crisis has a laundry list of coconspirators, but the bipartisan Commodities Futures Modernization Act of 2000 that deregulated credit default swaps was no innocent bystander any more than the Gramm-Leach-Bliley Act, famous for eliminating the Glass-Steagall Act, can hide in the shadows of obscurity.

Elections matter, although the influence of lobbyists and special interests increasingly dilute the will of the people. Unbeknownst to many voters, there is a building off New Jersey Avenue, a few blocks from the nation’s Capital Building, with cubicles where congressmen spend an estimated 50 percent of their time raising money. In Nation on the Take, Senator Dick Durbin explains, “We sit at these desks with stacks of names in front of us and short bios and histories of giving . . .  and we make calls to our faithful friends and ask them to give money or host a fundraiser” (Potter and Penniman 2017).

Industry Influences Legislation

The author F.A. Hayek would be aghast, writing in Road to Serfdom that any time public policy picks winners and losers, it is a form of socialism. The mechanics of reelection campaigns are not our concern, except that donors are more than just well-compensated middlemen who write checks. According to the Center for Public Integrity, lobbyists often write the legislation themselves while their clients raise money for the next election cycle and prep for evening interviews on cable TV (Brown 2006).

The cryptocurrency industry is all grown up, the bitcoin bros are trading flip-flops for business suits, ping pong tables for board rooms, and laser eyes for political influence. OpenSecrets, a research and government transparency group that tracks money in politics, reported that the crypto lobbyists spent $22.2 million in 2022 and $24.8 million in 2023 to finance their seat at the table (Norman 2024). It now seems that a trio of crypto-backed super political action committees (PACs) raised $202.8 million from large industry backers and spent $93.6 million to influence the 2024 elections by the end of June (Coghlan 2024).

To add context, last year the Chamber of Commerce spent $69.5 million, Blue Cross Blue Shield spent $28.5 million, and the Pharmaceutical Research and Manufacturers of America ponied up $27.6 million to whisper sweet nothings in the ear of elected officials (OpenSecrets 2024). Many of us give to charity without asking for anything in return. Selflessness is an admirable trait, albeit rare, but these transactions lack the faintest hint of altruism.

Setting partisanship concerns aside, money influences politics, and the cryptocurrency industry has lots of it. The digital asset interests have also created a robust infrastructure to allocate these resources, and the SEC, as well as other independent government agencies, are important to the adoption rate of a burgeoning asset class that is gaining widespread acceptance. This is a bipartisan circumstance, and the new crypto-focused super PAC Fairshake, backed by Coinbase CEO Brian Armstrong, have supported 13 incumbent lawmakers on both sides of the aisle, including House Financial Services Chair Patrick McHenry (R-N.C.), Rep. Dusty Johnson (R-S.D.), and Rep. Josh Gottheimer (D-N.J.) who are the biggest recipients (Goodman 2023).

Lo and behold, the U.S. House of Representatives passed H.R. 4763, the Financial Innovation and Technology for the 21st Century Act (FIT21), which provides clear and functional federal requirements for digital asset markets (Andhov 2024). This legislation would ensure consistent regulatory standards and remove some of the uncertainty that markets find objectionable, namely providing the framework for a cohesive SEC and CFTC strategy that has been lacking in the past. It includes operational requirements, conflict of interest rules, and provisions for custody by banking institutions.

This measure passed the House with 71 Democrats and 208 Republicans voting in favor of the bill versus three Republicans and 133 Democrats voting against it. Given the bipartisan support, and money at the disposal of the digital asset’s lobbying interests, it is reasonable to think the legislation will pass the Senate, even if the president would need to sign it into law.

It’s worth noting that the full House and Senate voted in favor of the measure to repeal the SEC’s staff accounting bulletin establishing accounting standards for firms that custody crypto in May 2024, also called SAB 121, only for President Joe Biden to veto it. Instead, firms that custody crypto are still required to record customer crypto holdings as liabilities on their balance sheets, which inhibits the adoption of bitcoin as a viable asset class.

Resolution may come in the form of a new SEC commissioner who is more amenable to the crypto industry. Gary Gensler’s term at the helm is set to continue into 2026, but it’s common practice for SEC chairs to step down when a new administration takes office. In the alternative, the SEC Stabilization Act, authored by two Republican congressman, calls to fire Gensler and restructure the SEC by eliminating the role of the chairperson. The bill would remove the role of the SEC chair and replace it with six commissioners.

Accounting for Bitcoin

The accounting methods used to value companies that hold bitcoin as a corporate asset may soon be amended. To its credit, MicroStrategy was the first public company to adopt bitcoin as its primary treasury reserve asset. The company’s total holdings of 226,331 tokens are worth roughly $15 billion at bitcoin’s current price. The company’s bitcoins were purchased at an average price of $36,798 each, or roughly $8.33 billion. In return, MicroStrategy shares have risen roughly 10-fold since the firm’s bitcoin purchases began four years ago.

It was quite the risky proposition for several reasons that go beyond the scope of extreme volatility, but namely the way crypto is valued on the company’s balance sheet. Bitcoin is currently classified as an indefinite-lived intangible asset. That means it does not meet the accounting definition of cash or a cash equivalent, a financial instrument, or inventory. Crypto currencies, therefore, must be accounted for at cost, subject to subsequent impairment as appropriate.

In other words, when the asset declines, the company must write down the value on its books. The converse, however, is not true. The value of such an asset cannot be written up when the price increases or when a previously written-down asset subsequently recovers. This provision makes it virtually impossible to book any ROI on digital assets held as investments and deters other public companies from following in the footsteps of MicroStrategy, regardless of how profitable the endeavor has been for shareholders.

Responsibility for enforcement and shaping of generally accepted accounting principles (GAAP) falls to two organizations: the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC). It remains to be seen what the implications of the recent Supreme Court decision Loper Bright Enterprises v. Raimondo will be. Suffice it to say that an enforcement action must survive intelligible principal challenges, that any demand by an agency must correlate to specific language, and it must be consistent with explicit things Congress wants parties to do. In the absence of such language, the matter would be subject to the opinion of a decidedly conservative Supreme Court.

Market Factors Affecting Bitcoin 

We cannot overlook the traditional matters that will affect bitcoin on a broader scale. First and foremost, global liquidity will have the biggest impact. Over the last 20 years, the Fed’s balance sheet has grown seven-fold from $1 trillion to $7.7 trillion, Fed data show. If the market goes up 20 percent and your homeowners’ insurance increases by the same amount, your insurance hasn’t gotten better, your money has just gotten worse (Grieve 2024). The craziest things happen when nearly two-thirds of the total existing money supply are created in the past 13 years (McMaken 2024). Having said that, some indices thrive more than others in this environment, and bitcoin has been the biggest beneficiary of rising global liquidity because of the store of value argument. They may create more dollars, but algorithmic constraints prevent more than 21 million bitcoins from ever being produced.

To arrive at any consensus on projected fiscal policy, it may be instructive to navigate the political calculus, or said another way, which political party is likely to spend more money and force the central bank to monetize the debt. No likely path exists for Uncle Sam to reduce the size of the deficit, let alone the debt itself, given the current interest rate environment and unfunded liabilities laying noticeably at the doorstep of Congress. We already spend more money on the interest on our debt than we do on the military, and that’s anticipated to become more onerous over time.

Federal debt held by foreign and international investors has also been in steady decline since its peak of 33 percent in 2007 and now stands at 22 percent (Congressional Research Service 2024), and there is only but so much demand for treasury obligations that will dramatically increase in supply. This debt, therefore, will need to be monetized, with the Fed purchasing the debt themselves. Last year, government spending was 30 percent of GDP when it is normally just 17 percent, and it’s widely assumed that the Democrats are less fiscally responsible. Upon closer inspection, Ronald Reagan increased the national debt by 186 percent overall and by 60 percent as a percent of GDP, far more than any other president in U.S. history (Richman 1988). Outside of Bill Clinton, who reduced the size of the deficit, subsequent administrations have all shown little willingness to rein in spending. Moreover, the drivers of the escalating deficits stem from mandatory spending, and it’s unsure if either candidate will alter the trajectory of future obligations.

A dominant theme over the next four years for digital assets will be regulatory certainty, accounting guidelines, and the monetization of our debt that increases liquidity. While voters will decide which candidate is better poised to lead the country, it may or may not have the impact we believe. After all, money talks, and Capitol Hill has been a historically great listener. Bitcoin has paid its fare, it’s here to stay, and it’s our responsibility to learn how to use it.

References 

Andhov, Alexandra. 2024, May 29. “The U.S. Financial Innovation and Technology Act: Initial Overview.” Forbes. www.forbes.com/sites/digital-assets/2024/05/29/the-us-financial-innovation-and-technology-act-initial-overview/.

Brown, Elizabeth. 2006, January 18. “Lobbying FAQ.” The Center for Public Integrity. https://publicintegrity.org/politics/lobby-watch/lobbying-faq/.

Coghlan, Jesse. 2024, June 28. “Biden-Trump Debate: Crypto Goes Completely Unmentioned.” Cointelegraph. https://cointelegraph.com/news/biden-trump-debate-didnt-mention-crypto.

Congressional Research Service. 2024, June 18. “Foreign Holdings of Federal Debt.” https://sgp.fas.org/crs/misc/RS22331.pdf.

Goodman, Jasper. 2023, November 20. “How a Crypto Super PAC Is Trying to Swing 2024.” Politico. www.politico.com/news/2023/11/20/crypto-super-pac-2024-candidates-00128032.

Grieve, Pete. 2024, March 1. “How High Could Home Insurance Rates Jump This Year? Here’s What Experts Predict.” Money. https://money.com/home-insurance-rates-predictions-2024/.

McMaken, Ryan. 2024, May 18. “The Money Supply Is Growing Again and the Fed Wants It That Way.” Mises Institute. https://mises.org/mises-wire/money-supply-growing-again-and-fed-wants-it-way.

Norman, Nicole. 2024, May 31. “Congress Blocked SEC Guidance on Crypto as Industry Lobbying Surged.” OpenSecrets. www.opensecrets.org/news/2024/05/congress-blocked-sec-guidance-on-crypto-as-industry-lobbying-surged.

OpenSecrets. 2024, April 24. “Top Spenders.” www.opensecrets.org/federal-lobbying/top-spenders?cycle=2023.

Potter, Wendell, and Nick Penniman. 2017. Nation on the Take. Chap. 2, “D.C. Sweatshops,” iBooks.

Richman, Sheldon L. 1988, October. “The Sad Legacy of Ronald Reagan.” The Free Market 6 (10). https://mises.org/free-market/sad-legacy-ronald-reagan.