One dream pick for a crypto-friendly treasury secretary in Donald Trump’s second administration will not be happening, as prominent hedge fund manager John Paulson said today that he won’t be taking the job.

Speaking about his decision, Paulson said, “My complex financial obligations would prevent me from holding an official position.”

That admission is certainly true. For example, Paulson’s massive equity positions in government-sponsored enterprises Fannie Mae and Freddie Mac, whose profits are swept into the US Treasury, have more than doubled in price since Trump won re-election. His conflict of interest is certainly evident.

With Paulson dropping out of the race, other contenders for the position include Key Square Group’s Scott Bessent, Cantor Fitzgerald’s pro-Tether Howard Lutnick, Jay Clayton, and Jamie Dimon.

Read more: Crypto promises that Donald Trump must now live up to

Crypto advocates had pinned hope on Paulson

Some crypto proponents had initially viewed Paulson as an incoming ally in the world’s most powerful sovereign treasury. Despite his previous skepticism towards digital assets, optimism stemmed from Paulson’s reputation as a savvy investor who has proven allegiance to Trump for years.

Just as Trump pivoted from anti- to pro-crypto during his career, so too might have Paulson. Indeed, after a half dozen NFT collections, a DeFi project, and various pro-bitcoin promises, Trump has certainly re-branded himself as a pro-crypto leader.

Read more: Tether’s dreams come true with Donald Trump victory

Many in crypto believed that Paulson’s understanding of financial markets and his willingness to embrace unconventional economic policies could translate into a favorable regulatory environment for the class. His leadership at the 100,000+ employee treasury would have been a welcome reprieve from Janet Yellen’s anti-crypto reign.

They hoped his appointment might lead to policies that would encourage innovation in digital assets and support the growth of bitcoin and other cryptocurrencies.

Although offshore binary options markets like Polymarket do not indicate actual odds of success, Scott Bessent is currently the frontrunner for Trump’s Secretary among prediction market gamblers.

Although Paulson will not be the country’s next Treasury Secretary, other pro-crypto contenders like Bessent and Lutnick are next in line.

As the Biden-to-Trump transition process continues, the industry will be watching closely to see how treasury leadership affects digital assets during the second Trump administration.

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On the eve of the US presidential election, the Bitcoin Policy Institute published a report endorsing a strategic reserve of bitcoin akin to US strategic reserves of gold, medical equipment, minerals, or petroleum.

Asking whoever becomes president to ask the US Treasury Secretary to buy bitcoin, the 53-page research paper attempts to cover the pros and cons of investing in the crypto as a sovereign.

The authors distinguish between bitcoin as a central bank asset held by the Federal Reserve and bitcoin as a discretionary investment of the US Treasury. The paper specifically advocates for the latter.

Authors tossed around proposals like a multi-year, dollar cost-averaging purchase program — or buying enough bitcoin to equal the amount of the Treasury’s gold reserves. After these far-from-conservative examples, the authors recommended forming governance boards to plan a realistic fiscal policy.

Readers might also be curious as to why the paper is asking for a strategic bitcoin reserve in the first place, given that Donald Trump has already promised a national strategic bitcoin stockpile. This plea is more understandable, however, when we consider that Trump’s stockpile is simply a re-naming of existing criminal seizures with no plan to actually purchase any bitcoin. 

Given this context, the plea is authentic to both Democrats and Republicans; neither Trump nor Kamala Harris have announced plans for any strategic bitcoin reserve.

Stablecoins prominently featured in pitch for bitcoin-only reserve

Straying far from bitcoin-only, the paper makes almost as strong a case for stablecoins as it does for bitcoin. Without naming any particular brand, it glowingly reported on stablecoins’ size, speed, popularity, and expansion of US dollar dominance abroad. 

Throughout the paper, the authors advocate for dual support by the US Treasury for bitcoin and stablecoins. Of course, they argue for a formal reserve of bitcoin as a sovereign investment, whereas they ask for general support of — not investment in — stablecoins.

Ironically, stablecoins fulfill many of the value propositions of bitcoin as listed in the paper: auditability, permissionless transactability, enabling capital flight for residents of collapsing regimes, extension of US dollar hegemony, technological leadership, supporting human rights, and control of the crypto-eurodollar market.

For some reason, the paper insists that bitcoin is superior to all other crypto assets on these and other functions.

Its authors never mention the actual, primary use case for stablecoins — denominating exotic derivatives and altcoin transactions in offshore crypto exchanges. They also never mention de-pegs, fraud, or theft of assets — perennial features of stablecoin projects.

Read more: History of Tether’s peg: Every time USDT traded above or below one dollar

The authors also never admit that stablecoins mostly operate on non-bitcoin blockchains like Tron, Telegram, Solana, EOS, Cosmos, and Algorand whose founders, according to the SEC, issued illegal securities to fund unregistered enterprises. 

Moreover, the authors failed to mention the dozens of stablecoins whose peg failed entirely. In particular, the paper contains no mention of Terra, a once-$18 billion stablecoin that has lost 99.8% of its value.

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During oral arguments this week related to an appeal of the US Treasury’s designation of Tornado Cash as a sanctioned entity, a US circuit judge revealed an embarrassing detail.

On Tuesday, in a live proceeding of the appeal of that designation, Van Loon et al. v. U.S. Department of the Treasury et al., Judge Kurt Engelhardt asked lawyers why the US Treasury was only able to cite three examples of illicit use out of the millions of Tornado Cash transactions.

As reported by Law360, these three examples are not just small in the context of Tornado Cash’s enormous volume. Worse, these three justifications for the US Treasury’s designation of Tornado Cash might be even more embarrassing for another reason: A separate, pre-existing sanction might have prevented them.

All three transactions involved North Korea laundering financial assets in violation of pre-existing US Treasury sanctions. Indeed, North Korea has been a sanctioned entity since 2006 — formally, a Specially Designated National — prior to the addition of Tornado Cash to that sanctions list in August 2022.

Therefore, Judge Engelhardt specifically asked why North Korea’s pre-existing sanctions were insufficient for the legal purpose of preventing the illicit use Tornado Cash, especially if the US Treasury was only able to cite three examples involving North Korea.

To be clear, an entity that fails to prevent sanctions violations might itself become sanctioned. For example, the US Treasury might sanction a bank that attracts Iranian or Venezuelan money launderers, even though Iran and Venezuela are already sanctioned.

However, at least one judge in the three-judge panel for the Fifth Circuit is questioning whether a separate sanction was needed for Tornado Cash.

Read more: Coin Center loses Tornado Cash lawsuit, intends to appeal

The case is ongoing.

Entirely separate from this appeal, the US government is criminally prosecuting the co-founders of Tornado Cash Roman Semenov and Roman Storm. According to an indictment, they conspired to launder money, operate an unlicensed money-transmitting business, and transact with sanctioned entities.

Storm is fighting the charges while Semenov remains at large.

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The US government is concerned about the unlikely yet destabilizing possibility of nationwide bank runs. The Federal Reserve and Treasury already bailed out two banks last week, including the second-largest bank failure in the country’s history: Silicon Valley Bank. Now, the US Treasury is considering a backstop of all bank deposits nationwide.

The Federal Reserve has introduced a new Bank Term Funding Program (BTFP) with up to $2 trillion in extra liquidity. The Fed’s BTFP allows banks to borrow cash equivalents at favorable rates for up to 12 months to survive bank run-induced panics.

Needless to say, with the scope and scale of these actions, the mood of US bank depositors remains disquieted.

The power to backstop all US bank deposits

The Treasury Department is looking at ways to support smaller banks. Bloomberg reported that staff at the Treasury are considering an unprecedented guarantee of all US bank deposits, including account balances exceeding the FDIC’s $250,000 insurance limit. The guarantee could, if approved, cover deposits at US banks of all sizes, including regional and community banks.

Treasury Secretary Janet Yellen said the Treasury could cover deposits if bank runs were to pose a contagion risk, but she hasn’t yet made that commitment. During a speech she gave at an American Bankers Association event, Yellen further clarified that she didn’t intend to favor “specific banks or classes of banks.”

The Treasury could dip into a fund created in the 1930s called the Exchange Stabilization Fund. It usually uses the Exchange Stabilization Fund to trade foreign currencies and loan money to foreign governments. However, with relevance to a nationwide bank guarantee, the Treasury has also used it to make emergency loans to banks.

Read more: Blame the Fed: David Sacks and the VC who cried bank-run

Some members of Congress expressed support for an increase in the FDIC insurance limit. The House of Representatives’ Freedom Caucus opposed the move, saying it would encourage banks to continue engaging in risky behavior at public expense.

Regardless, the Treasury is studying legal avenues that could bypasss Congress altogether on such an initiative. It’s looking for the fastest path to establish an emergency guarantee facility in order to support banks facing bank runs that could harm their ability to fulfill withdrawal requests.

The Mid-Size Bank Coalition of America requested the move, citing a potential financial crisis. They asked regulators to lift the FDIC’s current $250,000 cap on deposit insurance.

Read more: Bitcoin rallies amid Credit Suisse, Silicon Valley Bank failures

Major banks collapse this month

• Silvergate Bank suffered a bank run after FTX and Alameda Research filed for bankruptcy. The two companies founded by Sam Bankman-Fried had held accounts at Silvergate.
• Another large bank, Silicon Valley Bank, also suffered a $42 billion bank run fueled by social media rumors. This run drained its cash reserves. The FDIC declared it a systemic risk to the US banking system. It backstopped all deposits in full — even accounts holding more than $250,000.
• The FDIC also backstopped another failed bank this month: Signature Bank.
• As Credit Suisse succumbed to one of the largest bank failures in world history, the Swiss government, alongside the European Union, orchestrated its bailout by UBS.

Many banks are teetering on the brink of bankruptcy this month. Publicly traded bank stocks saw steep drops in price. Smaller banks also saw an upswing in withdrawals, sparking fears that the FDIC would ignore runs on small banks in favor of giant, systemically important banks.

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The Treasury Department and Internal Revenue Service (IRS) announced today they’re seeking guidance on whether to treat non-fungible tokens (NFTs) as a collectible under tax law.

The notice explains that under section 408(m) of the tax code, acquiring a collectible through an individual retirement account (IRA) is treated as “a distribution from the IRA equal to the cost to the IRA of the collectible.” Similarly, the acquisition of a collectible by an individually directed account “shall be treated as a distribution from the account equal to the cost of the account of the collectible.”

The tax code classifies collectibles to mean:

• any work of art,
• any rug or antique,
• any metal or gem,
• any stamp or coin,
• any alcoholic beverage, or
• any other tangible personal property specified by the Secretary for purposes of this subsection.

In other words, the IRS can choose to add NFTs to the tax code as constituting a collectible. However, currently Section 408(m)(3) specifies that “certain coins and bullion are excluded from the definition of collectible.”

The classification of NFTs as collectibles has repercussions for capital gains tax. As the IRS states in its notice, the sale or exchange of a collectible that’s a capital asset held for over a year “is subject to a maximum 28% capital gains tax rate.” Assets not considered to be collectibles are generally subject to lower capital gains tax rates.

Further, this decision effects new markets tax credit, enterprise zone business, tax shelter registration, and permissible investments for health savings accounts, the IRS stated.

IRS wants to know if you think NFTs are collectibles

The IRS updated the wording of its tax guidance in 2022 for its Form 1040, to explicitly reference NFTs. It broadened the wording of “virtual currency” to “digital assets” in order to include NFTs in tax forms.

Now, it wants to know if you think NFTs count as collectibles. In its notice, the IRS stated that under its own analysis, an NFT constitutes as a collectible if it represents ownership of something it already classifies as a collectible. “For example, a gem is a collectible and therefore an NFT that certifies ownership of a gem constitutes as a collectible,” it noted.

In the same vein, if an NFT represents ownership of something else, like the right to develop a “plot of land” in the metaverse, it may not count as a collectible.

Read more: NFT designer arrested for allegedly evading crypto tax in Israel

This distinction has raised a conundrum within tax filings that has led the IRS to open itself up to comments from the public, in order to gain a better understanding of how to classify NFTs for tax purposes.

The Treasury and the IRS want to know several things, among them:

• whether it has even classified NFTs correctly in its notice,
• if its analysis of NFTs constituting as collectibles in certain cases makes sense (or if other alternatives exist),
• the burdens such a classification would place on NFT owners,
• and what factors it can use to better classify NFTs.

Comments can be submitted until June 19.

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