Guaranteed Crypto Loss
By Bartlett Naylor
Bitcoin, a cryptocurrency, is “based on thin air.” It is a “scam.” It can facilitate unlawful behavior, including drug trade and other illegal activity.” These are Public Citizen positions. But they are also direct comments from then President Donald J. Trump.
Public Citizen continues to believe cryptocurrency is a Ponzi scheme and enables illicit activity. It also wastes enormous energy, contributing to climate change. We support the efforts of the Securities and Exchange Commission (SEC) to enforce securities law with respect to these public offerings, and of criminal law enforcers to arrest crypto actors who engage in fraud and other market manipulations. The FBI reported crypto-related fraud exceeded $5 billion in 2023.
Trump, however, has pivoted into full-throated and potentially self-enriching endorsement of the sector. He now serves as the “chief crypto advocate” for World Liberty Financial, a nascent cryptocurrency firm. If elected president, Trump would have a glaring conflict of interest as Washington attempts to address policy for this fraud-ridden sector.
In October, World Liberty Financial began selling Trump-sponsored tokens, a digital asset and another name for an individual cryptocurrency. Importantly, unlike standard cryptocurrencies, they can’t be resold.
The most common cryptocurrency, bitcoin, consists of a string of computer code. They can be bought and sold for fiat currencies, such as the U.S. dollar. When the pseudonymous Satoshi Nakamoto conceived of bitcoin in a 2008 white paper, there was little initial interest. Purchasers could buy one bitcoin for less than one penny. Since then, the price has soared, collapsed, soared again, collapsed again. Presently, it sells for nearly $70,000. Earlier purchasers made millions in profit; others who bought high and sold low have lost money.
There are thousands of such cryptocurrencies. The market capitalization of the 100th largest cryptocurrency is $686 million as of the time of this writing. That’s enough to buy more than 300 McDonald’s franchises, which are physical businesses with actual revenue. (Market capitalization means the most recent selling price of one of these tokens multiplied by the total number of such tokens. This is different than the total amount of money spent on the coin. Consider a crypto sponsor that offers a million tokens. If one is purchased for $1, then the market capitalization is $1 million. If that token is resold for $10, the capitalization soars to $10 million, even though a total of only ten dollars has gone into the cryptocurrency.)
The value in these cryptocurrencies derives exclusively from what another buyer is willing to pay for it. Economists uncharitably call this the “greater fool theory.” Unlike stock in a traditional company, there is no business, no revenue, no profit. Owning one bitcoin does not yield a quarterly dividend. Presumably, this is why Trump called cryptocurrency “thin air.”
But this Trump crypto is worse because it cannot be resold.
Trump’s crypto buys only “governance.” “ As a (sic) owner, you’ll instantly gain a voice in shaping the future of DeFi.,” according to the website. DeFi is short for decentralized finance, a term that means financial transactions that don’t involve a traditional firm such as a bank.
The Trump token is officially called the $WFLI. World Liberty Financial explains, “As a $WLFI owner, you have an exciting power.” This “power” refers to an “opportunity” to submit and review proposals and vote on them. The firm offers few details on what this actually means. Many cryptocurrencies come with a “white paper,” just as Nakamoto wrote when the creator conceived bitcoin. World Liberty Financial explains these opportunities in what it calls a “gold paper.”
Meanwhile, as in the Eagles’ Hotel California song, purchasers of this token can buy in, but can’t get rid of or resell them. As World Liberty Financial details, “The sole utility of holding $WLFI is governance of the WLF Protocol. $WLFI will be fully functional for its governance utility at the time of completion of the token sale. $WLFI provides no right of return or other distribution. All $WLFI will be non-transferable and locked indefinitely in a wallet or smart contract. until such time, if ever, $WLFI are unlocked through protocol governance procedures in a fashion that does not contravene applicable law.” [Emphasis added.]
Put more bluntly, these details essentially guarantee a 100 percent loss for those who thought they are “investing.”
Not surprisingly, some call this a scam, or a “full-on scam,” in the words of Anthony Scaramucci, a former Trump press secretary. Rep. Wiley Nickel (D-N.C.), a crypto enthusiast, called Trump’s effort a “grift.”
Nor has the roll-out of this “governance” token gone smoothly. On the first day, computer glitches compromised the offering. Since then, although 20 billion tokens of $WLFI are for sale, and the goal was to raise $300 million at 1.5 cents each, buyers purchased less than 5 percent, raising for World Liberty Financial about $12 million, as of October 21, 2024, .
Trump’s role in this enterprise is limited in responsibility but generous in remuneration. He is neither the owner nor officer of World Liberty Financial. Instead, he is the “chief crypto advocate.” His three sons, including college freshman Barron Trump, are “Web3 Ambassador(s).” And a Trump-connected entity called DT Marks DEFI LLC “will receive 22.5 billion $WLFI tokens and a right to receive 75% of the net protocol revenues.” Should World Liberty Financial ever sell all 20 billion governance tokens, Trump would receive more than $200 million.
As for the “opportunity” to shape the future of decentralized finance, public purchasers will easily be outvoted by insiders at World Liberty Financial. In addition to Trump, insiders control 70 percent of the tokens.
The owners and officers of World Liberty Financial bring a colorful history to this enterprise that may concern the sober investor . Chase Herro and Zak Folkman count among five individuals listed as “co-founder(s).” The New York Times explained, “Mr. Herro has described himself as ‘the dirtbag of the internet,’ while Mr. Folkman used to teach classes on how to seduce women.” Herro has acknowledged drug offenses and time in prison. Trump, as has been reported, brings his own considerable rap sheet and other dubious miscellanea to this business adventure, including one criminal conviction, three other criminal indictments, a loss in a civil sexual harassment case, two impeachments, six bankruptcies and other blemishes.
Beyond an uncertain initial launch of an idiosyncratic crypto venture, Trump’s personal compensation for this company could become a serious policy conflict should he win the presidency. Currently, the SEC views cryptocurrencies offered to the general public as securities that must comply with registration and disclosure requirements. Trump’s initial crypto may avoid this requirement because purchasers of $WLFI must be “accredited.” This means that they must earn more than $200,000 a year, and/or hold more than $1 million in assets (beyond the value of their residence.) Purveyors to such investors need not register with the SEC. This limit of sophisticated investors may also help explain the poor sales of the Trump governance token; they understand it’s worse that standard crypto. The real money for crypto sponsors, however, comes from selling them to ordinary investors, those who may earn or own little. Surveys show that vulnerable communities make up a sizeable share of those owning crypto.
Trump could name a crypto friendly SEC Chair who might disagree with the Commission’s current view of crypto registration and reporting requirements. And World Liberty Financial could broaden its sales to conventional cryptocurrencies. For instance, its gold paper references a future stablecoin. Stablecoins are akin to a money market mutual fund, where an investor’s dollar represents one token. Ideally, the sponsor of a stablecoin takes the investment dollars and buys safe securities such as US Treasuries. When the investor wants his or her money back, the stablecoin sponsor sells Treasuries and redeems the customer. A less-than-ideal sponsor could siphon the money into speculative ventures. The New York Attorney General brought a case against Tether, the largest stablecoin, for unsafe business practices, settling for an $18.5 million fine. Sam Bankman-Fried stole funds from customers who were using his FTX crypto exchange.
How Washington will shape crypto policy has drawn the largest political war chest in corporate spending history. Public Citizen’s Rick Claypool documented this phenomenon in two reports. As of August 2024, the crypto sector amassed $169 million to spend in support or opposition to candidates based on their crypto statements and votes. That’s more than any other sector is spending in elections—more than Wall Street, Big Oil, and Pharma. It’s nearly half of all corporate money contributed in the 2024 election cycle. It’s 15 percent of all known corporate money contributions since the U.S. Supreme Court’s disastrous 2010 decision in Citizens United that made such unlimited corporate political spending legal (expanding the previous 1976 Buckley decision). Alone, this deluge of corporate spending constitutes an unprecedented, frightening corruption of lawmaking, the starkest example to date, as Public Citizen co-president Robert Weissman opined.
Conflict-of-interest laws already apply to senior government officials, barring them from participating personally and substantially in any particular matter in their government work that would have a direct and predictable effect on their financial interests or financial interests that are imputed to them (for example, financial interests held by their spouses). Although these laws don’t apply to the president or vice president, all modern presidents before and after Trump divested their interests in specific enterprises and invested in mutual funds, non-commercial real estate, and similar investments. During his presidency, Trump’s conflicts sprawled from his lease of Washington’s Old Post Office building to business dealings in Panama. The Presidential Conflicts of Interest Act, sponsored by Sen. Elizabeth Warren (D-Mass), and other related bills would help plug the loophole that excuses the president from the law addressing conflicts of interest. Crypto investment is a significant potential conflict for the presidential hopeful.
To protect against conflicts of interest guiding policy decisions of any future president or vice president, Congress should act swiftly to pass needed reforms, such as the Presidential Conflicts of Interest Act.