Will Crypto Crash the Blue Wave?

Transcript Will crypto crash the blue wave? Probably not a question you’ve been asking, but you should. Paul Krugman here with a video update for September 22nd. I want to talk about something that was a very big deal in the way we talked about the 2024 election, which was the role of the cryptocurrency industry. We’re talking about it a lot less this time, I think largely because AI has stolen the limelight. But crypto is still out there. And while it has not succeeded in creating a viable business in the normal sense, it has been extraordinarily successful at buying political influence. And they’re set to do it again. Now, the background here is, as I record this, the midterm elections look, based upon polling, based upon just impressions, looks like a big blue wave. Elliot Morris gives the Democrats a 97% chance of taking the House and two-to-one odds of taking the Senate. But there’s still a few weeks to go and it looks like there’s a big wave of right-wing money that’s going to come crashing in. We don’t know how effective that will be. The role of money in politics, particularly of last-minute advertising blitzes, is somewhat unclear. But it is coming and crypto is going to be a pretty big part of it. Based on Open Secrets, which tracks campaign financing, it appears that the crypto industry, which spent big in 2024, is going to spend even bigger in 2026, which is unusual because midterms are usually lower stakes than presidential years: They don’t usually involve as much spending. But this industry is going to go all in. The crypto political strategy has been to knock out candidates that it considers hostile. And that is a strategy that was very effective in the last election cycle. They spent money in primaries knocking out Democrats, because Democrats were by no means united in their skepticism about crypto, but in some cases in favor. They knocked out Democrats in favor of other Democrats in primaries. And then in the general election, they spent quite a lot, not entirely on Republicans, but there were some big cases. And then Ohio spending was a particular success story. And in general, crypto became seen in Washington as a force to be afraid of. Not a force that has actually managed to get anywhere in the economy. It’s nothing like AI, which is everywhere. Crypto is still barely used for legitimate transactions. According to the Federal Reserve, only 2% of Americans have actually used crypto to buy something other than assets. So basically non-speculative crypto use remains trivial. And that’s after many years of trying to market this stuff. But the political effectiveness has been huge, and it has intimidated a lot of politicians. Back in February, Chuck Schumer warned his colleagues not to do too much to offend Fairshake, the big crypto lobbying group. Crypto has also, in addition to campaign contributions, done a lot of what in the old days, we would call bribery. There’s a lot of money that flows from the crypto industry to politicians and their relatives, and not just Trump. I don’t really want to ask too much about why there’s a lot of money going into a firm founded by Senator Gillibrand’s son. So there’s a big financial issue. Now, the Clarity Act posed as “we’re going to establish a sound regulatory framework, especially for stablecoins” — cryptocurrencies that supposedly have a guaranteed value in dollars. Why exactly did Democrats turn on it? I mean, on the merits, they were right to be against this because whatever one may say, the purpose of the Clarity Act was to kind of legitimize cryptocurrency in the economy and particularly to legitimize stablecoins, which are, once you cut through the jargon and all of that, essentially poorly regulated banks. It would essentially be posing new threats to the stability of the financial system and undermining banking regulation, which is something, of course, that the Trump administration and its allies are trying to do anyway, but this would have been another step in that direction. Presumably many of the Democrats who voted against this, and there were some Republicans as well, but presumably many of the senators who voted against this thing were genuinely concerned. But I also think that there’s some spillover. For analytical purposes, cryptocurrency and AI are quite different things, and they are actually playing a very different role in the economy. Companies are really investing in AI, rightly or wrongly, but they are really trying to put it to use. And cryptocurrency is being used only for, pretty much only for, criminal activities, including, by the way, Iranian efforts to bypass U.S. sanctions. But in the public mind, it’s all tech. It’s all fancy jargon. It’s all doing stuff we don’t quite understand. Sounds fancy. AI turned out to have an interesting political trajectory. It really is impressive. I mean, it really is impressive what it can do. Who would have thought that matrix algebra with a little bit of non-linearity could produce what feels like a conversation with a chatbot? Who would have believed that you could do vibecoding the way you do. Now whether all of that is economically productive is another question. And whether it kills us all is yet another question. Still, crypto has not done any of that. But it feels, I think, to a lot of people similar. And the bad reputation that AI has quickly developed, I think, is spilling over to anything techie and therefore has meant that the support for crypto is weaker than it was. It’s also true, by the way, that there was a big boom in Bitcoin prices after Trump was elected because everybody thought he was going to be the crypto president, was going to do great things for the industry, which then kind of evaporated. There’s been some recovery in crypto in the last few weeks, which I actually suspect, I mean, no one quite knows, but I actually suspect has something to do with the fact that, well, the Iranians have found a use for crypto. That basically illegitimate uses of cryptocurrency are turning out to be significant. So there is that. But in any case, the industry is still out there. There are still trillions of dollars in assets. And it’s an industry that had developed a really effective political strategy. They couldn’t actually produce stuff. But if we count the 1.4 billion or so that Trump personally has made from crypto as part of its campaign contributions, then crypto may be the biggest single political financial force out there. Will it work this time? The answer is, of course, I don’t know. It’s going to be a lot of money. It does look as if basically, as best I can make out from the Open Secrets data, crypto may end up spending, well, something like an Elon Musk-sized amount on these elections. It’ll be much more partisan. The primaries are over, and in the general election, there are not going to be a lot of Republicans out there that they’re going to try to defeat. And also, they have a clear sense of where the balance lies. I mean, Susan Collins did vote against the Clarity Act. Nobody, seriously, is going to give her credit. She’s pulled this too many times. Nobody’s going to think that the crypto industry should try to defeat Susan Collins. But they will try to defeat Sherrod Brown, even though Brown himself has softened his anti-crypto rhetoric. He has talked about it very little. But if he wins, he might well be the deciding vote or one of the two deciding votes in a Democratic majority in the Senate. And we now know that the Democratic Party is not clean as the driven snow. It is not immune to financial influence.It’s not even immune to de facto bribery from crypto. But it’s a completely different universe from the Trumpian Republican Party. And so the crypto industry knows that if Democrats really do sweep, if this is a blue wave which brings them not just the House but the Senate, it will be a less favorable environment. So their scam will be greatly endangered. And so here comes crypto. Now, it’s only part of t… Get full access to Paul Krugman at paulkrugman.substack.com/subscribe