This post is part of series on the law and political economy of cryptocurrency. Read the rest of the posts here.
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When I went online to pay my Colorado state taxes earlier this year, I was given the option to pay with cryptocurrency. I declined. But, as an academic interested in taxation and cryptocurrency, I was intrigued. It turns out that Colorado is one of a number of states that have either proposed or implemented policies that allow taxes and fees to be paid using cryptocurrency.
This trend, I argue in this brief post, offers a window into crypto’s political economy—one that can help us separate the reality of the crypto movement from its stated ideals. Rather than eschewing government involvement, crypto interests are partnering with state governments to craft demand for the currency. Far from privatizing money or breaking free of centralized control, crypto interests are using government institutions as powerful market actors. This trend also foretells a potential power struggle between the Federal Reserve and other government institutions over monetary policy.
Putting the Currency in Cryptocurrency
The crypto movement is nothing if not ambitious. It aims to revolutionize the global financial system and rival or supplant fiat currency. To achieve these lofty goals, however, people need to use it to pay for things en masse. Generally, for something to serve effectively as a medium of exchange, it must be broadly accepted for payments. To date, however, the uptake of cryptocurrency as a payment method has remained stubbornly low. According to the Federal Reserve’s annual report on economic well-being, only 2 percent of Americans used cryptocurrency in 2024 to buy something or make a payment. (By contrast, Americans are much more likely to use cryptocurrency for investment purposes, with roughly 7 percent of Americans using cryptocurrency for that purpose in 2024.)
So how does a medium of exchange achieve broad acceptance? Or, put differently, how did coins, paper notes, and the like become money to begin with? There are two main theories. The first, orthodox theory of the origins of money, is market-based. In the natural flow of an efficient market, barter exchange gave way to commodity money which eventually gave way to paper money and then bank money. While the government might be involved in this process, its role is as a supporting actor of natural market forces. The second view, by contrast, offers a state-based theory of money. Under this theory, the government is recognized as exerting significant influence over the dominant medium of exchange, including through taxation. Most citizens must pay taxes as a debt to the government each year, often constituting one of their largest expenses. By allowing (or requiring) that these taxed be paid in a specific currency, the government generates demand for that currency. As economist Ross Starr succinctly explains: “Taxes can be used to create a demand for money independent of its usefulness as a medium of exchange, thereby ensuring that its price will not fall below zero.”
Cryptocurrency has been said to and would seem to embody a non-state theory of money. It represents a story about the evolution of money as technologies and economic circumstances have shifted. But when states accept cryptocurrency for tax payments—even when hardly anyone uses cryptocurrency to pay for, well, anything—we can see cryptocurrency as part of a different story. In this story, cryptocurrency is linked to the state. The market has not created sufficient demand for cryptocurrency as a means of payment, so crypto interests have turned to states to craft that demand.
It is unclear if this strategy will work. Thus far, most Colorado taxpayers have gone the same route as I did and continue to pay their taxes with fiat currency. At the very least, however, these states are conveying a message to its citizens: cryptocurrency is legitimate, and it is useful. Tax payments in cryptocurrency are voluntary right now. But, at an extreme, one could envision a world in which paying taxes in cryptocurrency becomes mandatory, moving the trend from symbolic to coercive.
The Myth of Privatization
There is a broader lesson we can take from the role of state tax remittance in the story of cryptocurrency: true privatization is a myth. The government remains a principal market actor even in the context of an economic and technological phenomenon that is surrounded by an ethos of radical libertarianism and anarchy.
The crypto industry is not just accepting but actively cultivating government intervention in markets on its behalf. Prior to the collapse of FTX and his conviction for fraud and other crimes, Sam Bankman-Fried allegedly directed $100 million in campaign donations during the 2022 midterms. President Trump benefitted significantly from crypto industry donations in his 2024 campaign and, more disturbingly, is personally gaining from investments in his $TRUMP meme coin. The coin is now publicly trading, and his family’s stake is estimated to be worth approximately $5 billion. He has now turned from a crypto skeptic to the leader of the “crypto capital of the planet.”
Crypto industry advocates may argue that they are simply lobbying the government to adopt a laissez-faire approach to cryptocurrency. But having states accept cryptocurrency as tax payments is not laissez-faire—it is using the power of the government as people’s primary debtor to craft a demand for currency. Advocates have also pushed for cryptocurrency transactions to be exempt from capital gains tax. That is not laissez-faire—it is a tax expenditure. Establishing a U.S. Bitcoin reserve is not laissez-faire—it is propping up the value of Bitcoin. Regulatory “clarity” that allows the crypto industry to follow its own special set of rules (or lack thereof) is active government intervention on behalf of a particular industry.
If you view cryptocurrency as a new payment method, this government capture by the crypto industry should be concerning. If you instead view cryptocurrency as a speculative asset with little to no underlying value, it becomes alarming. Government actors, including state tax authorities, are being recruited to craft the demand necessary to prop up what is essentially a Ponzi scheme—one worth $5 billion to our current president and his family.
State-level Monetary Policy
Crypto industry interests are intertwined with government players. But there remains at least one government institution with which crypto remains at odds—the Federal Reserve. The decision by states to accept cryptocurrency for tax payments thus reveals a second insight into the political economy of cryptocurrency: an emerging power struggle over monetary policy. These states, by crafting a demand for cryptocurrency, are engaging in monetary policymaking. Yet, at least for the past hundred odd years, monetary policy has been a federal, not state-level, enterprise. While Congress sets the overarching goals for monetary policy, it is implemented by the Federal Reserve, its Board of Governors and the Federal Open Market Committee. The agency’s decisions do not need to be approved by the President or Congress.
Beyond crafting demand for a new currency, some states are also trying to prevent the rise of a competing digital currency that would be under the control of the Federal Reserve—a central bank digital currency (CBDC). Indeed, some states have even put forward legislation stating that they will not accept tax payments in a hypothetical CBDC.
The incursion of states into monetary policy has significant and troubling legal implications. The Constitution clearly provides that states cannot make cryptocurrency a legal tender for payment of debts. But the constitutionality of states pursuing alternative currencies and intervening in monetary policy is less clear. It opens up debates not visited for over a hundred years.
But the political story that it tells is also significant. Crypto interests are teaming up with government actors to pursue their goals of upending the financial system, engaging in aggressive lobbying and generously donating to political campaigns. The Federal Reserve, as an independent, un-elected body, cannot be influenced as easily. President Trump’s attempted firing of Federal Reserve governor Lisa Cook shows that the administration desperately wants to do so. Even if one believes that the Federal Reserve itself should be more democratic, there are still sound reasons for a wanting uniform, national monetary policy.
As states invade monetary policy by collecting taxes in cryptocurrency, they are players in a larger battle. They are taking power away from the Federal Reserve, advancing a currency that will be beyond its control. Right now, the actions of these states are largely symbolic. These tax payments do not constitute enough economic activity to shift behavior in any meaningful way. But if the same strategy were employed by other government actors, such as the IRS, the consequences could be shattering. Crypto could achieve its stated goal of demolishing reliance on central banks. They would accomplish it not by working outside of government institutions but by capturing them.
