May 7, 2021

Brian Brooks used his position in government to boost Bitcoin, and I'm curious to see how this plays out

       As I wrote in an earlier post, ingrained in O'Melveny's culture was the idea that a job in government isn’t accepted to serve the voters, the public, or the country – it’s taken to serve yourself, and the people who pay you. It's something to be "monetized." O'Melveny even tried (unsuccessfully) to change case law to make it hard to prosecute public officials who engage in quid pro quo corruption. And of course it's not just O'Melveny. Last week, Senator Ted Cruz pledged to stop granting favors in exchange for corporate contributions. In response, former Director of the Office of Government Ethics Walter Shaub tweeted that Mr. Cruz said what "everyone knows: [they] sell access. Others have the sense not to admit it." 

       One possible example of a public official who monetized his job might be Brian Brooks, former O'Melveny partner and head of its D.C. office. In 2020, Mr. Brooks left his position as General Counsel of the cryptocurrency exchange Coinbase to lead the Office of the Comptroller of the Currency ("OCC"), the federal agency that regulates national banks. He was appointed by his former boss Steve Mnuchin. Mr. Brooks was never confirmed by the Senate, but that didn't stop him from "unilateral[ly]" serving the cryptocurrency industry (quoting the letter written by members of the House of Representatives to rebuke Mr. Brooks.) 

       It appears as if Mr. Brooks served crypto well. When he became Acting Comptroller in April 2020, Bitcoin was worth about $6,000. As he issued statements and official government releases blessing crypto, Bitcoin's price shot up and rose to $50,000 in just nine months. (For examples of such statements and releases, see here, here, here, here, here, here, herehere . . . .) This shouldn't be a surprise. The U.S. government's imprimatur is worth something, and when Mr. Brooks gives an agency’s blessing to cryptocurrency, you'll see an impact on price. 

       But Brian Brooks is no longer in government. He left the OCC in January of 2021. He took a job as the CEO of the U.S. arm of the notorious crypto exchange Binance -- the exchange reportedly singled out by the Financial Action Task Force for doing curious things to evade anti-money laundering laws and other regulations. It does seem like Mr. Brooks hijacked the OCC for his own purposes.

       With Mr. Brooks unable to maintain his stream of pro-crypto government releases, and Bitcoin in a possible bubble, I'm curious to see how all of this plays out. Everything that was wrong with crypto before Mr. Brooks took office is still wrong it.

       1. Countries do not want a competing currency. One of the statements Mr. Brooks repeats over and over is that the dollar is rendered worthless, as a result of monetary policy, and so the public should adopt Bitcoin instead. He wants to move to a world that's "done with fiat [dollars.]" (See 1:25:15 or 1:29:03 in this video or 16:12 in this video.) How do you think governments will react if you try to take away a key economic tool? As crypto's market cap goes higher and higher, it will be a bigger and bigger blip on governments' radars. Right now, the market cap of Bitcoin is about $1 trillion, and the market cap of all cryptocurrencies combined is about $2 trillion. That's still unimportant (it's the market cap of just one large multinational company's stock). But if it gets to $5 trillion or $10 or $50 trillion, be certain that at some point governments will react.1

       2. Bitcoin is not a hedge against inflation, as Mr. Brooks claims. The next time Mr. Brooks points to the U.S. government printing money, and claims Bitcoin will protect you -- ask him one simple question. If you buy $50,000 of Bitcoin right now, how much of his personal money or Binance's money will he set aside to guarantee that you will earn at least inflation (as you could over a five, ten or thirty-year time horizon with a TIPS instrument.) Of course, I'm being facetious as no one would ask such a silly question, but you get the point.

       3. As Treasury Secretary Yellen stated, Bitcoin has high transaction costs and, even worse, we don't know what these will be in the future. Related to this are crypto's high energy costs, and despite Ms. Cathie Wood's "down is up, black is white" claim that these high energy costs are good for the environment (because she claims they'll push more people into green energy), they are also a concern.

       4. Of course, there are the anti-money laundering (“AML”) issues with cryptocurrency. Not all crypto is purchased for the purposes of evading tax, money laundering, and sanctions laws, but if you are trying to evade them, crypto is perceived to be a useful tool. At some point, and this is inevitable, the Department of Justice will prosecute an institution once thought to be clean. At the same time, the government is working diligently to develop technology, training and regulations to decode the hidden identity of crypto users. In time, crypto will lose its luster as a tool for private transactions, away from the government’s eye. This will remove a significant part of crypto's use case.

       5. We do not need new software to transfer money. That's all cryptocurrency is. As crypto advocate Susan Athey states, Bitcoin is just a "big spreadsheet that keeps track of who owns what" ("who" meaning which Bitcoin address, not which person. It wouldn't be a useful money laundering tool if the ledger kept track of Bitcoin owners' names.) In that same article, she states that we need this new software, because you can't use traditional financial accounts to pay some types of people quickly. But that's because banks and financial institutions restrict their customers and transactions -- due to concerns about fraud and AML rules. Take those rules away and traditional payment networks will be able to pay anyone in the world instantly. Anyone will be able to open an account at a bank, even using a fake name, and send and receive money that instant. The programming part of this is not hard. The legal part is the challenge. For example, the Hawala system moved money anywhere in the world instantly, before computers existed, using only a pad, a pencil and a phone call. But it never replaced traditional banks, partly because the U.S. government pursued it for AML violations. Other than to evade those legal rules, we don't need new software for payments. 

       Despite the promises, crypto is not a serious form of payment anywhere in the world and with its issues, it's not clear if it ever will be. Bitcoin has been around for over a decade and I still don't see it as a payment option at the vast majority of retailers. If you want to pay with Bitcoin, you have to convert it into dollars first and then pay.

       If the current bubble ends, it will cause significant pain to people who recently moved their dollars into crypto. I do not know when it will end. It could end now, when crypto's market cap reaches $5 trillion, $10 or even $50 trillion, at which point it will pose an existential threat to national currencies. Who knows. But it can end. Monetizing government for your own purposes works in the short term, sometimes, but it's much harder to make it work in the long term -- especially when you're taking a position counter to the interests of government.  
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I don't want to speculate about how governments will react, but notice that central banks are already considering their own digital currency, whose value will be the same as their nation's currency  (Central Bank Digital Currency or CBDC) to compete with and replace cryptocurrencies like Bitcoin. 
Brian Brooks, Binance, Binance.us, Coinbase, Bitcoin, Ethereum, crypto, cryptocurrency, regulation