The crypto industry is being embraced by this administration. The U.S. has a Crypto and AI Czar and we’ve seen a massive shift in attitude on the regulatory front.

This has culminated in the GENIUS Act, a law that now establishes rules for stablecoins in the U.S.

This is all great news for the crypto industry.

This Act, and the lift it provides for USD-based stablecoins, should pave the way for innovation and development driven by the U.S. while encouraging global investment in the U.S. dollar.

Unleashing Parabolic Growth in Stablecoins

Now that the GENIUS Act has passed, the Treasury Department estimates that stablecoins could reach $3 trillion in short order.

• Large banks, and private parties of all types, will likely launch stablecoins rapidly.
  • There are already a lot of headlines about plans to launch stablecoins or to incorporate stablecoins into existing financial transaction ecosystems. Many market participants, of all shapes and sizes, are exploring opportunities in the space, now that the GENIUS Act and other regulatory rulings have provided much more clarity, and support domestically, than the cryptocurrency industry has had in the past.
  • While no one can say for certain, many proponents of recent legislation and rulings believe this might create a “generational opportunity” to develop alternatives to traditional cash management tools.
• Financial engineering spurred by the new regulatory framework could rapidly increase global adoption as many investors and savers will see this as the easiest and most efficient way to get exposure to the S. dollar. If you are in an unstable country, or a country where the currency could easily depreciate significantly, the stablecoin revolution could make it easier for you to protect yourself from that risk.
• With the “ease” of adoption improving (we believe that it will with the increased competition from stablecoin issuers), more people across the globe should have this ability. While some investors and savers have already tapped into stablecoins and the crypto ecosystem, that number and the “investible wallet” should increase dramatically.
• The growth of USD stablecoins could likely result in increased international demand for the dollar, as we believe the U.S. dollar will be the primary currency to back these stablecoins.

While we could see rapid growth in the crypto space (with the U.S. potentially poised to be a global leader), the industry still faces some major issues, one of which is theft.

Hacking and Theft

With the opportunity and potential rapid growth of the industry (including both more products and many more users), thieves are likely preparing to ramp up their efforts. We used “hackers” in the title for this section, but the reality is that these are criminals and thieves, not just “hackers” (which doesn’t have as strong of a negative connotation as it should). Even worse, from a U.S. policy perspective, many of these criminals and thieves are “state-sponsored,” typically by countries that are adversaries of the U.S.!

North Korea is already notorious in the space. The North Korean-based Lazarus Group is just one example of an entity with alleged links to hacks and thefts. Like everything else in the cybercrime world, Russia, China, and Iran, in particular, figure most prominently. They all use various entities to achieve their aims. While not “State Actors” officially, there is plenty of evidence of “State-Sponsored” activity. Just like Iran’s use of “proxies” provided Iran with a “fig leaf” of cover in the kinetic (actual military) world, these “loose” or “difficult to prove” associations make it harder for the West to respond.

At Academy we’ve discussed the almost unbelievable amount of money places like North Korea seem to generate from ransomware (in the billions of dollars, annually). There are also estimates that they generate billions of dollars a year from crypto theft. In many cases, due to the state-sponsored nature of these criminal activities, these thefts allow our adversaries to fund themselves and hurt our interests.

Why Can’t We Stop It?

Like so much in the realm of cyber, the U.S. (and much of the Western World) have not developed rules or policies to keep up with the current technology.

At Academy, almost 8 years ago, General (ret.) Hernandez helped us and our clients understand where the U.S. stood on responding to cyber-attacks. The nation “knows” how it would respond to a missile attack – likely a kinetic response – such as firing back at them. The nation even “knows” how it would respond to a “dirty bomb.” The administration would try to quickly assess where the nuclear material came from and would go after any country involved, very aggressively (think 9/11 and Afghanistan, which wasn’t a dirty bomb but was a direct attack on U.S. soil).

But on cyber? The nation and even the legal system seem to get bogged down in “uncertainty around attribution.” There is so much fear that a mistake on attribution (though not very likely) would lead to punishing someone innocent, that the national security system handcuffs itself on potential responses. The U.S. often resorts to “name and shame” and presumably some counter cyber-attacks that are not public knowledge, but fall short of what many would deem “appropriate punishment.” The punishment meted out doesn’t seem, to many, to be of the same order of magnitude as the crime itself, likely emboldening criminal activity. The best defense against crime is the threat of punishment. Deterrence is why we have a criminal code, law enforcement, and a judicial system focused on implementing that criminal code. Deterrence is the first line of defense against crime, but that only works if criminals believe that they will be caught and punished.

This has been an issue in cyber, and I think there are some things that we should highlight around crypto crimes as the expected rapid growth of stablecoins is likely to create an equally rapidly growing risk of crypto crimes.

• Latency. Talking to experts, one of the biggest problems that we face is “latency.” Crypto criminals are FAST!
  • If the criminals merely stole a stablecoin and let it sit in some wallet somewhere, the authorities would probably be able to find the stolen “asset.” They should be able to reverse most crimes by identifying the token in question, “burning it,” and then withholding the “collateral” (presumably T-Bills) which back that token. That collateral could then be returned, potentially to the rightful holder. But that isn’t what the criminals do.
  • Criminals rapidly convert the stablecoin into some other form of crypto and proceed to “wash” it as quickly as possible. What often seems to happen in practice is that by the time the authorities have identified the original theft, and have the appropriate signoffs to do something about it, it is too late, as the criminals have taken multiple steps to ensure that they keep the proceeds. It is a sophisticated digital game of “cat and mouse” tracking the original theft, but so far, it is common that the authorities cannot move fast enough to return the funds and punish the perpetrators (taking back the funds is certainly part of that “punishment”). The risk that the authorities do not act in time does little to discourage the criminals from trying again in the future.
  • It is not uncommon for laws and institutions to be forced to catch up to new technologies. Innovation, by its nature, will be ahead of what existing systems are designed to regulate and protect.
• The Power of Innovation. Government entities tend to be conservative. They tend to be cautious and reluctant to change (how many years have we been writing about well-known and discussed issues with payroll data for example, or CPI). American technology has been incredibly successful because we unleash creativity and then let the best ideas rise to the surface.
  • The criminals are highly incentivized to attack, develop technology, and try new things all the time. They can be nimble. They only need to find the “weakest” links to be successful. It seems like we may need to confront them with a similarly incentivized group.

Now we can finally move on to the main idea – using some things embedded in the Constitution, that we have not used, for a variety of reasons, but might provide a solution to the problem of crypto theft.

Crypto Privateers and Letters of Marque

There are any number of potential solutions or plans to deal with cyber theft on the table, but we wanted to highlight one that we think deserves more thought.

At this time, we are more “thinking aloud” as we have to explore the option, especially the risks associated with going down this path, more closely. We are by no means endorsing this as a possible course of action, only identifying it as an idea that is being debated by others. We also note that Congress has not exercised this power in over two hundred years.

Yet, it deserves some attention and wanted to toss the idea out there, to set our own analysis in motion, but also to get your takes!

Now let’s explore the concept.

Maybe it is time to use an “old solution” for a “new problem.”

Historically, Letters of Marque have been granted by governments (and kings and queens) as a way to unleash “entrepreneurs” to address problems that are either too expensive or too complicated (for a variety of reasons) to deal with directly.

When we examine some “reasons we are not successful at stopping” the crypto threat, we highlight two main issues:

• Latency. Our systems are too slow to respond timely enough to defend people in this space. The “good” nation states may not want to escalate at the “nation state” level, which also slows our response.
  • Creating “privateers” through “Letters of Marque” could solve much of the latency issue. The “privateers” could be able to react quickly as they would be freed from many of the restrictions that slow “official” responses.
• Creativity and Incentives. The criminals have everything to gain, but now those fighting them would have a lot to gain as well. The crypto privateers would be developing strategies to fight the criminals. Successful strategies would be rapidly adopted, but would not slow innovation as they move on to whatever strategy is next for the criminals.

A decent parallel might be what we’ve seen in Ukraine.

• Fear of Russia’s Cyber Prowess. When the war started, there was a lot of fear that Russia’s cyber capabilities would overwhelm Ukraine. That the cyber war was lost even before it started. But an ad hoc collection of “white hat” hackers was loosely cobbled together and has done an excellent job (as far as we can tell) of not just defending Ukraine but also keeping Russia on its toes.
  • This group is not an “official” cyber army, but has acted as such and has likely been incredibly successful, which is a lesson that should be applied to our suggested approach for crypto theft.

An Elegant, Effective, and Beneficial Solution

How would this work? Here is a rough and very quick outline that we will expand on further. Chris Perkins, President of CoinFund and an Advisory Board member with Academy Securities, has been helping us understand this idea. In any case here is our first cut. We focus a bit more on the potential benefits and why this idea has caught our attention, than all of the potential risks, though we plan to explore both sides with vigor as we evaluate this idea further.

• Providing Letters of Marque. Some sort of application process would be required. Individuals, groups, or companies would need to address their credibility.
  • Address concerns about whether applicants for Letters of Marque have the skills and resources needed to be effective.
  • Address concerns about the integrity and level of responsibility of applicants. The government does not want to empower bad actors accidentally.
• Risk and Reward.
  • Reward is the easy part. For crypto that is found and “captured” by those provided with a Letter of Marque, some allocation of the proceeds will need to be determined (likely in advance).
    • Some amount to the original holder who was victim to the theft. Not all of it can be returned, or the system would not work. Also, from a “responsibility” standpoint, if everything was returned, stablecoin holders wouldn’t adopt “best practices” since they would face limited repercussions from being sloppy on protecting their own assets. Will those who were stolen from think this is fair compensation? While better than 0, it is a far cry from the 100% that many victims might hope for. That could be a major sticking point.
    • Some amount to the U.S. government. Instead of the current situation where we pay money and get little in return, the government would pay little and get something in return. Not just the money paid by those who were issued the Letter of Marque, but also through the “additional security” created by the creation of this force.
    • Some amount to the “privateer.” That is the incentive that makes this entire system work.
  • The Risk. If the privateers attack “innocents” then that money will need to be returned (possibly with something extra for “damages”). Some level of “false positive” will likely need to be tolerated to allow the privateers to act with enough speed to be effective.
    • Letters of Marque can be taken away from those who have too many violations or otherwise prove counterproductive.
    • While we have “assumed” a world of state-sponsored actors and diligent privateers, even with best efforts, it is possible that somehow mistakes could be made that hurt U.S. citizens. That would be a real issue.

The devil is always in the details, but we found it intriguing enough that we wanted to share it with you, for your thoughts and feedback.

Trump’s Privateers

What attracts us to think about this potential solution is that it has the potential to work on so many levels.

• It will encourage technology development by the U.S. as privateers will be highly incentivized to be at the cutting edge of technology.
  • As the population (across the globe) understands that their assets are safer under this system than they currently are, adoption could grow.
• It could potentially solve much of the “cost” issue and if anything could provide the U.S. government with net income to reduce the deficit.
• While not common today, Letters of Marque helped shape history, so the idea may not be as out there as it seems on the surface.

I’m not sure we will see Mar-a-Lago be renamed Tortuga any time soon, but exploring Letters of Marque, or some modern day equivalent, further could help grow the crypto industry as safely as possible. We need to explore the practicalities and the downsides in more depth.

Bottom Line

We are in a rapidly evolving space that was given a big boost by the GENIUS Act, but there are challenges, risks, and potential threats that need to be addressed as best as possible.

Hopefully, this gives you a lot to think about, as it is a complex problem looking for a solution, and this idea of enabling privateers is interesting enough that it deserves to be explored further.

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Digital assets, including stablecoins, are subject to unique risks, including technological, operational, legal, and regulatory uncertainties. Stablecoins are not legal tender, are not issued or guaranteed by the U.S. government or any central bank, and may not always maintain a stable value. They are not insured or protected by the Federal Deposit Insurance Corporation (FDIC), the Securities Investor Protection Corporation (SIPC), or any governmental agency. Redemption rights and underlying reserves for stablecoins, if any, may be subject to third-party risks and may not be fully transparent or verifiable.

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