Once upon a time, there was an emperor who loved to be on trend. So he was receptive when some charlatan tailors promised to make him a suit from a new high-tech fabric, a suit so comfortable that he would feel like he was not wearing anything. “Fortune smiles on the bold,” they told him.
Of course, the reason the suit was so comfortable was that it didn’t exist; the emperor walked around naked. But the congressmen in his entourage didn’t dare tell him that, because they knew that the tailors who cheated the emperor controlled lavishly funded super-political action committees that would spend vast sums to destroy the careers of anyone who revealed their scam.
Okay, I’ve changed the story a bit. But it’s one way to understand the extraordinarily important role that the cryptocurrency sector plays in financing election campaigns this year.
Bitcoin, the original cryptocurrency, was introduced 15 years ago and promoted as a substitute for old-fashioned money. But until now has not found significant uses that do not involve any kind of criminal activity. The cryptocurrency sector itself has been plagued by theft and scams.
However, while cryptocurrencies have so far been virtually unable to find legitimate applications for their products, they have been spectacularly successful in commercializing their offerings. Cryptocurrencies, which are traded in exchange for other cryptoassets but otherwise seem suited primarily to things like money laundering and extortion, are currently worth which is around two trillion dollars.
And in this election cycle, the cryptocurrency sector has emerged as a major player in campaign finance. Well, huge: Cryptocurrency, which is not a huge industry in terms of employment or output (even if we assume, for the sake of argument, that what it produces is actually worth something), represents almost half of corporate spending in political action committees in this cycle.
Political spending is not only massive, but it takes an unusual form. While cryptocurrencies are associated with libertarian ideology and the sector’s spending has shown a partisan tilt toward Republicans, crypto-funded super-action committees don’t appear to be going after Democrats per se, instead focusing on politicians who have urged greater scrutiny of the sector, including the financial risks it poses and its marketing tactics. In particular, attacks in crypto-funded ads helped defeat Congresswoman Katie Porter, who has been critical of the sector, in the Democratic primary for senator in California.
Politicians have taken note. In 2021, Donald Trump called bitcoin a scam. But last month he promised to turn the United States into a “bitcoin superpower” and described crypto critics as “left-wing fascists.” The Biden administration has taken modest steps toward oversight and regulation of cryptocurrencies, but Chuck Schumer, the Democratic Senate majority leader, has declared that “we all believe in the future of crypto” and has reportedly tried to enlist industry players to back Kamala Harris’s campaign.
The massive political spending and influence of an industry that, if anything, destroys value rather than creates it (especially given its environmental impact) is surprising. But in a way it makes sense.
Consider those tailors who swindled the emperor. If they had simply dressed him in an ugly suit, they would have lashed out at anyone who dared point out its ugliness. But it is much harder to silence people when they do not criticise the emperor’s fashion sense, but instead expose the fact that he has been completely fooled. In that case, a campaign against the detractors would have to be much more intense, even desperate.
It’s true that almost all major industries spend some money trying to influence politics to their advantage, and some spend considerable sums trying to suppress criticism. The fossil fuel industry gives a lot of money to politicians who oppose environmental regulations—which right now means that overwhelmingly supports Republicans— and over the years has provided large-scale funding to initiatives that challenge the reality of climate change.
But criticism of the oil industry, for example, is unlikely to precipitate a sudden implosion; after all, oil is an industry that produces things with real uses, and many oil companies will likely find profitable niches even as we move to a green economy. On the other hand, cryptocurrencies should not be considered a real industry; they are based solely on the perception that someday, somehow, we will find a genuine use for their products.
Obligatory disclaimer: Some people I talk to claim that blockchain, the concept behind cryptocurrency, may have some real business uses. But this really has nothing to do with the grand claims about bitcoin and its rivals.
Back to politics: We don’t know what will happen if the government gets serious about regulating cryptocurrencies, policing both their criminal uses and their marketing practices. But much, if not all, of that $2 trillion valuation could simply evaporate.
Hence the explosion of political spending. It is a demonstration of power, but one that betrays desperation. It is an involuntary confession that the emperor has no clothes.
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