The Appropriate U.S. Response to Trudeau’s Financial Overreach

T o strike at the coalition of truck drivers demonstrating against his government’s vaccine mandates, Canadian prime minister Justin Trudeau ordered financial institutions to search customer records and sanction both the protesters and those who had given financial support to them. Banks investigated the accounts of anyone identified by the government as being a participant or a donor and froze them, all without warrants or court approval. This was a manifestation of expanding state power, which would have been unimaginable just a couple of years ago in a democracy.

Trudeau’s move to cut off the truckers’ money, aided and abetted by the banking system, was extraordinary, but as government failures become more visible and severe, there is an obvious temptation for governments to take what tools may be to hand to crack down on dissenting citizens. Regardless of your opinion of vaccines, mandates, or the truckers themselves, this display of overreach raises the question of how something like it could be prevented in the U.S. The Canadian episode laid out in plain view that giving a government power over financial accounts is giving it the power to use those accounts as it, not the owners, deems appropriate.

Fortunately, blocking crypto payments turned out to be easier said than done. The concept of “censorship resistance” is one of crypto’s core value propositions and existential to its creation. It is a voluntary, decentralized alternative, free from the control of governments that monopolize traditional currencies. Crypto is peer-to-peer money, and transactions on the blockchain are impossible to “censor,” freeze, or seize. Therefore, crypto provides a critical barrier to currency regulation and financial snooping by governments. Unfortunately, however, the White House last week issued an executive order directing departments to study the costs and benefits of further crypto regulations, a potential sign that more will be coming.

The government subsidizes, regulates, licenses, and controls banks. Through them, it can in principle grant permission of uses only as the state sees appropriate, which in Canada turned out to be economic sanctions against peacefully dissenting citizens. In the case of cryptocurrency, banks have no custodial role, meaning that they cannot control how it is used. Cash transactions aside, we effectively need (even if it’s unspoken) permission to spend the conventional currencies we own, and that permission can be, and in Canada was, denied without due process. Cryptocurrencies and other peer-to-peer cash systems cut out banks and empower individuals. Put another way, they threaten the state monopoly over the uses of funds.

Representative Warren Davidson (R., Ohio) has introduced important legislation to prevent the state monopoly from squashing and controlling private competition. The Keep Your Coins Act takes aim at attempts to undermine crypto and subjugate it to state control by the introduction of rules requiring that individuals store their digital assets with an “authorized” custodian. The problem is of course that the custodian, much like a bank, will be the pathway for the government to track assets and thus ultimately try to control them, as in Canada. This is not without historical precedent. FDR invoked a national crisis to confiscate physical gold in 1933, making government the sole custodian and leaving Americans with strips of paper in place of their coins and bullion. Mandatory third-party custody of cryptocurrencies follows that same playbook.

Davidson’s bill protects the right to self-store digital assets and blocks any law or regulation that mandates third-party custody. It’s important to have third parties trusted voluntarily rather than mandatorily. Mandatory third-party storage would destroy the volunteerism that defines crypto and could ultimately lead to expropriation as it did in Canada. The Keep Your Coins Act limits the government’s ability to infringe an individual’s property rights and privacy.

Monopolies never like competition, and hence demands that blockchain technology companies acquiesce to government demands are sure to continue. But competition in currencies, as in other industries, lowers prices, thereby benefiting consumers. The same is true for cryptocurrencies that reduce the time and cost of conducting transactions, particularly international ones. A member of Congress has informed us that the Treasury Department has worked toward protecting its own currency by making self-custody either illegal or impractical. If it succeeds, all beneficial innovation in this space will occur offshore, harming American innovators and customers, while protecting the monopoly itself.

Keynesian economists in particular, who believe that the Fed’s monetary policy can use price controls in credit markets to dampen business cycles, worry about the implications of introducing a new, competing form of currency. If that’s the concern, other economists might take issue with the belief that even the best-intentioned and smartest officials can achieve the Keynesian goals of monetary policy. When we look at the situation today, with the Fed still pursuing inflationary policy with rampant inflation and contemplating raising rates in the middle of the economic uncertainties created by the invasion of Ukraine, it’s not hard to see why.

A common argument in favor of government custody of crypto is that it will help reduce the number of illegal transactions. But the gains from a lower cost of legal transactions, which make up close to all the volume in cryptocurrencies, likely swamp any loss derived from their use in a small share of illegal transactions. The most reliable source on crypto transactions, Chainanalysis, finds that “transactions involving illicit addresses represented just 0.15% of cryptocurrency transaction volume in 2021”; such transactions rose in absolute terms but less so than overall volume. However, cash is currently the international currency for illegal transactions, and crypto custody would simply ensure that it continues to be.

It’s no great surprise to find a call for centralized, state control of money in The Communist Manifesto. If a centralized authority commands the financial system, it is easier to regulate and reduce economic activity carried out beyond the auspices of the state. Mr. Trudeau is no communist, but it is not reassuring to see the company he was keeping when he used state control (albeit without state ownership) of the banking system in the way that he did. Representative Davidson’s bill to protect cryptocurrencies is a step in the right direction to prevent something similar from taking place in the United States.

Tomas J. Philipson is an economist at the University of Chicago and a former member and acting chairman of the White House’s Council of Economic Advisers. Jeffrey Wernick is a co-founder and the CEO of Parallel Economy and a pioneer crypto investor.