How Mainstream Crypto Companies Should Interpret Biden’s Executive Order
President Biden finally released his long awaited and anticipated executive order (EO) that begins to regulate cryptocurrency. Of the seven main tenets of the EO, most are not that concerning. But some are.
(1). Protect U.S. Consumers, Investors and Businesses: Everyone wants consumer protection. No legitimate crypto exchange or business wants to see people scammed by fraudulent ICOs or anything else. So at 50,000 feet, this seems fine. However, the latter half of the provision is where things get concerning: “The Order also encourages regulators to ensure sufficient oversight and safeguard against any systemic financial risk posed by digital assets.” Effectively, this gives Treasury, the SEC, the CFTC and multiple other agencies and divisions the authority to regulate crypto however they like. They can decide whether or not it’s an asset class. How it should be taxed. Whether borrowing is allowed. What reserve requirements should exist for stablecoins. What types of disclosures are necessary. Whether there should be a federal license required for exchanges. And so many more. This is the provision the regulators all wanted in the EO and they got it. Absent real political mobilization, this will come back to burn the crypto sector.
(2). Protect U.S. and Global Financial Stability and Mitigate Systemic Risk: This too is another catch-all for regulators, giving the newly created Financial Stability Oversight Council the power to identify and mitigate systemic risks posed by digital assets. Again, this is a very broad tool for regulators and one that can be used to significantly damage the growth of crypto in the United States absent real political pushback. In particular, the open-ended proposal to control systemic risk threatens broader regulation than exists within the mandate of existing regulators.
(3). Mitigate the Illicit Finance and National Security Risks Posed by the Illicit Use of Digital Assets: This makes a lot of sense. Not only are there threats to our security by the multiple illicit items that can be untraceably purchased on browsers like Tor, any dictator currently watching the situation in Russia has to be thinking “we should move as much of our economy as possible into crypto to evade the sanctions that are killing the Russian economy.” Putin’s lack of foresight on this issue created a cautionary tale for other bad actors and a clear need for this provision in the EO. What this means in real terms is that crypto owners should expect much closer scrutiny on their wallets and on transfers between wallets, not just on fiat off-ramps.
(4). Promote U.S. Leadership in Technology and Economic Competitiveness to Reinforce U.S. Leadership in the Global Financial System: This directs the Department of Commerce to start prioritizing creating crypto related jobs in the U.S. That’s very good and if one Biden cabinet member can succeed with this, it’s Commerce Secretary Gina Raimondo. There’s a tremendous opportunity for the nation to capture the bulk of crypto related jobs and provide a boost to the economy. But it will only happen both if the regulations that will come from provisions 1 and 2 above are not overly restrictive and if the government actually, proactively uses its assets and resources to lure crypto businesses here.
(5). Promote Equitable Access to Safe and Affordable Financial Services: I don’t know anyone in the crypto world who thinks that the U.S. financial system is currently accessible, affordable or fair. The very existence of crypto is a rejection of the status quo. Minorities and the underbanked already utilize crypto to a higher degree than the fully banked, so whatever the crypto community can do to expand access and equity makes sense.
(6). Support Technological Advances and Ensure Responsible Development and Use of Digital Assets: This revolves around the creation of a U.S. backed digital asset class with priorities provided to privacy, security, combating illicit exploitation and reducing negative climate impacts. If the U.S. government were to create a digital dollar, it would be surprising and problematic if they didn’t do so with the priorities above. If this is meant to apply to tokens and exchanges beyond what the U.S. government may create, then this is a very broad provision that could be used problematically by regulators.
(7). Explore a U.S. Central Bank Digital Currency (CBDC): This directs the government to assess the infrastructure and needs for a CBDC. I don’t think a central digital asset will necessarily resonate with crypto fans. The question regulators should consider is whether digital currencies should be centralized or should retain the crypto ethic of decentralization.
