Beware State Crypto Cronyism

PLUS: A larger than normal state news roundup.

Photo credit: Stock Catalog

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A North Carolina House committee this week held an initial hearing on a bill — titled the Digital Assets Investment Act — that would give the state treasurer authority to invest state funds in cryptocurrency, those digital currencies such as Bitcoin that are detached from any governing authority.

The bill has the enthusiastic backing of North Carolina’s new House Speaker, Republican Destin Hall, as well as support from Democratic Gov. Josh Stein. But it was placed on hold by the committee pending testimony from the state treasurer himself.

Meanwhile, the Texas Senate is scheduled to vote on a similar bill to create a “strategic Bitcoin reserve” on Thursday, with expectations that it will pass.

These are just two of the many bills flying around state legislatures that would allow public dollars to be invested in cryptocurrencies, either directly into specific crypto products or into indexes (think mutual funds) composed of various currencies. Two states — Michigan and Wisconsin — already allow such investments through their state pension funds, and at least another 18 saw bills introduced this year that would enable them to follow suit. Some of these bills allow up to 10 percent of state assets to be invested in crypto.

In addition to Texas, boosters have managed to clear legislative hurdles in Utah, Arizona, and Oklahoma, but at least five bills — in Montana, Wyoming, North Dakota, New Mexico, and South Dakota — were voted down or tabled. "I am not signing on to that stuff and I can't imagine a majority of your constituents want you to," Montana Republican State Rep. Bill Mercer said during floor debate.

And he was right to be opposed: These efforts will have the functional effect of making a lot of money for crypto investors while providing no real benefits to taxpayers or state governments.

This state-level push is being driven by, first, the national political context, in which President Donald Trump has become a major crypto booster — after the industry spent heavily on behalf of both parties in the last election, to great effect — and has called for a national “strategic” crypto reserve (despite crypto having no strategic value to a federal government that can print and manage its own currency).

Second, a state-level lobbying operation led by an organization with ties to long-standing conservative political infrastructure has pushed elected leaders to introduce pro-crypto legislation.

And it doesn’t hurt that shiny new industries always have appeal to legislators who want to give the impression that they’re on the cutting edge of technological trends (even if they’re usually very much pulling up the rear).

At the most fundamental level, though, cryptocurrencies are speculative instruments, prone to boom and bust cycles, with no real use beyond that. And unlike other investments a state might make, they don’t pay dividends or interest. They just sit there until they’re sold, fluctuating wildly in value — and, not for nothing, are also favored by some of the worst economic actors due to their anonymity, and are the lever for billions of dollars in scams, particularly aimed at older people.

As Dennis Kelleher, CEO of Better Markets put it, these state efforts are "a brazen attempt by a handful of crypto billionaires and their political allies to take money out of Main Street taxpayers’ pockets to create artificial demand for a highly volatile product that suffers from boom-bust cycles, is full of fraudulent trading and pricing in unregulated markets, and has no socially legitimate use, but is loved by criminals."

“It’s yet another crypto solution in search of a problem,” Mark Hays, associate director for cryptocurrency and financial technology at Americans for Financial Reform, told The Lever. “It brings state institutions, which are inevitably taxpayer-funded, closer to the risk inherent in these markets.”

Indeed, states investing in volatile assets — of course — introduces that volatility into the pools of money needed to pay the pensions of teachers, police officers, firefighters, and other public servants. As a lobbyist for the State Employees Association of North Carolina said, “Bitcoin has been a roller coaster at best, and state employees and retirees do not like the conversation about investing in this highly volatile currency.”

Sure, you can show a positive trend line for some forms of crypto — while others have gone bust completely — but even then it’s full of ups and downs, while state funds should be aiming for long-term stability. Cryptocurrencies are also frequently targeted by hackers, with thefts totaling more than $2 billion last year.

The big winners of state investments in crypto, then, would not be public entities, workers, or taxpayers, but current crypto holders, who would see tens of billions of dollars flood into markets in which they’re already invested, enabling them to walk off with substantial gains before the next crash. Bitcoin markets alone would have seen, by one estimate, $23 billion flow in if all the above bills enabling state investments became law. Most crypto is held by just a few investors — 2 percent of accounts hold 90 percent of Bitcoin, for instance — who would be in line for that substantial windfall.

Meanwhile, the public stamp of approval would be planted on an scam financial product, and the crypto industry would insert itself into line for a crisis-induced bailout when things next go south, thanks to its connection to state pension funds and other public portfolios.

This isn’t the only way state legislators have sought to boost the crypto industry. Others have, for example, pushed to have their states accept cryptocurrencies as payment for taxes and other fees and fines, which would enable them to start building a stockpile. Still others have funneled public subsidies to the industry for the noisy, energy-intensive processes it requires.

Now, I know some lawmakers are doing this out of legitimate libertarian leanings that draw them to the story crypto industry boosters tell about the benefits of a stateless money system. But the practical effect of state investments in crypto will be a payout to pump up the holdings of those folks shoving these bills through the political system, with no actual upside for taxpayers. Level-headed state legislators should be kicking these bills to the curb.

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SIMPLY STATED: Here are links to a few stories and news items that caught my eye this week.

• The Massachusetts Attorney General announced new rules to ban mandatory, undisclosed junk fees under state law.

• The Colorado House passed a ban on junk fees as well.

• Washington State could repeal a cap that limits the taxes paid by its biggest corporations.

• Utah is the first state to pass a bill requiring app stores to verify users’ ages in an effort to protect kids.

• Lawmakers in several states are working to re-invigorate corporate practice of medicine law, which is supposed to ensure that corporate suits can’t influence medical decisions.

• A bill introduced in the Florida Senate would make it much harder for monopoly utilities to raise rates.

• Florida insurance corporations steered billions of dollars to shareholders and affiliates while claiming they were losing money and raising rates on policyholders.

• A Nevada bill would deliver the largest corporate subsidy in state history to the film industry.

• The Indiana Senate approved a series of measures to rein in pharmacy benefit managers (PBMs) including having the state potentially create its own PBM for the state employee health plan.

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— Pat Garofalo