Naked Emperors and Crypto Campaign Cash

Paul Krugman

Once upon a time there was an emperor who loved being fashion-forward. So he was receptive to some fast-talking tailors who promised to make him a suit out of new, high-technology fabric — a suit so comfortable that it would feel as if he were wearing nothing at all. “Fortune favors the brave,” they told him. Of course, the reason the suit was so comfortable was that it didn’t exist; the emperor was walking around naked. But the members of Congress who made up his retinue didn’t dare tell him. For they knew that the tailors deceiving the emperor controlled lavishly funded super political action committees that would spend large sums to destroy the career of anyone revealing their scam.

OK, I changed the story a bit. But it’s one way to understand the remarkably large role the crypto industry is playing in campaign finance this year. Bitcoin, the original cryptocurrency, was introduced 15 years ago and was promoted as a replacement for old-fashioned money. But it has yet to find significant uses that don’t involve some sort of criminal activity. The crypto industry itself has been racked by theft and scams.

But while crypto has thus far been largely unable to find legitimate applications for its products, it has been spectacularly successful at marketing its offerings. Cryptocurrencies, which are traded for other crypto assets but otherwise mainly seem suited for things like money laundering and extortion, are currently worth around $2 trillion. And in this election cycle the crypto industry has become a huge player in campaign finance. I mean huge: Crypto, which isn’t a big industry in terms of employment or output (even if you posit, for the sake of argument, that what it produces is actually worth something), accounts for almost half of corporate spending on PACs this cycle.

Crypto political spending isn’t just huge; it takes an unusual form. While cryptocurrency is associated with libertarian ideology and the industry’s spending has had a partisan tilt toward Republicans, crypto super PACs don’t seem to go after Democrats per se; they single out politicians who have called for greater scrutiny of the industry, including the financial risks it poses and its marketing tactics. Notably, crypto-financed attack ads helped to defeat Rep. Katie Porter, who has been critical of the industry, in the Democratic primary for California senator.

Politicians have taken notice. In 2021 Donald Trump called bitcoin a scam. But last month he promised to turn America into a “bitcoin superpower” and described crypto skeptics as “left-wing fascists.” The Biden administration has taken modest steps toward oversight and regulation of cryptocurrencies, but Sen. Chuck Schumer, D-N.Y., the majority leader, has declared that “we all believe in the future of crypto” and reportedly has been trying to get crypto industry players to back the Kamala Harris campaign.

The gigantic political spending and influence of an industry that, if anything, destroys value rather than creates it (especially if you consider its environmental effects) is startling. But in a way it makes sense. Consider those tailors who scammed the emperor. If they had merely clothed him in an ugly suit, they would have lashed out at anyone who dared point out its ugliness. But it’s much harder to silence people when they’re not criticizing the emperor’s fashion sense, but are instead laying bare the fact that he has been completely deceived. In that instance, a campaign against skeptics would have to be far more intense, even desperate.

True, almost every major industry spends some money trying to influence policy on its behalf, and some spend considerable sums trying to suppress criticism. The fossil fuel industry gives a lot of money to politicians who oppose environmental regulation — which at this point means that they overwhelmingly support Republicans — and has over the years provided large-scale funding to efforts questioning the reality of climate change.

But critics of, say, the oil industry aren’t likely to precipitate a sudden implosion; oil is, after all, an industry producing stuff with real uses, and many oil companies will probably find profitable niches even if and when we transition to a green economy. Crypto, on the other hand, shouldn’t be thought of as a real industry; it rests on nothing but the perception that someday, somehow, we’ll find a genuine use for its products.

Obligatory disclaimer: Some people I talk to claim that blockchain, the concept that underlies cryptocurrency, can have some real business uses. But this really has nothing to do with the big claims about bitcoin and its rivals. Back to the 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’s a demonstration of power, but one that betrays desperation. It’s an inadvertent confession that the emperor has no clothes.