Biden issues Executive Order to tame digital currencies

President Joe Biden on Wednesday signed an Executive Order directing US government agencies to develop a framework to promote and police digital currencies.

“The [Executive Order] will help position the US to keep playing a leading role in the innovation and governance of the digital assets ecosystem at home and abroad, in a way that protects consumers, is consistent with our democratic values and advances US global competitiveness,” said NEC Director Brian Deese and National Security Advisor Jake Sullivan in a statement.

The “Executive Order on Ensuring Responsible Development of Digital Assets” calls for: protecting consumers, investors, and businesses; protecting US and global financial stability; mitigating unlawful uses and national security risks of cryptocurrencies; promoting US competitiveness in cryptocurrencies; promoting equitable access to financial services; supporting related technical innovations; and – potentially the most important part – exploring a US Central Bank Digital Currency (CBDC).

According to the White House, digital assets, including cryptocurrencies, achieved a market capitalization of $3tr last November, up from $14bn five years earlier. Already 16 per cent of adult Americans – about 40 million people – have conducted cryptocurrency transactions. And in more than 100 countries, sovereign digital currencies known as Central Bank Digital Currencies are being considered.

Concurrently, cryptocurrency firms have been hiring lobbyists and pouring money into campaign contributions to ensure the tolerability of any rules that get formulated. Last August, Open Secrets, a non-profit that tracks lobbying and campaign spending, reported that $2.4m had been spent lobbying lawmakers on the bipartisan Senate infrastructure bill, but ultimately failed to have a new financial reporting requirement removed. The non-profit said that the cryptocurrency industry was on track in 2021 to spend nearly double the $2.8m spent in 2020.

Law and order

Illicit crypto transactions also nearly doubled in 2021, according to blockchain security biz Chainalysis, who say illicit blockchain addresses last year received $14bn in unlawful proceeds, almost twice the $7.8bn recorded in 2020. This, the company said, represents progress, because lawful cryptocurrency usage is growing faster than criminal usage. That claim has been questioned by industry critics like Stephen Diehl who observed those figures omit deceptive behavior like wash trading.

“The EO makes clear that digital currency that plays a role in our financial system may be regulated (including capital requirements), depending upon the degree of functionality that a particular digital currency plays that is similar to the role played by current financial institutions or payment systems,” Joseph Lynyak III, a partner at law firm Dorsey & Whitney, told The Register.

“What the EO did well was lay out criticisms of the cryptocurrency world – and asked the various federal agencies to evaluate how allowing digital currency should be regarded to avoid down-the-line systemic risk,” said Lynyak. “It is merely the start of the debate, and the federal government has laid down a marker that it will not be a bystander as the debate unfolds.”

Rohan Grey, assistant professor at Willamette University College of Law and author of the forthcoming book “Digitizing the Dollar: The Future of Public Money in the Age of Cryptocurrency”, told The Register that he welcomes the administration’s attention to digital currencies.

“I think it’s great to see a kind of clear, positive guidance coming from administration about the importance of a digital dollar and I think it’s also important to have a coordinated, comprehensive regulatory response to the broader cryptocurrency sector,” he said.

Grey said the administration’s approach is unnecessarily narrow, which he raised in Congressional testimony, in its decision to frame the digital dollar purely as a CBDC.

“I think that’s an important part of a digital dollar,” he said. “But the reality is that a central bank is only one institution within the United States government that has an interest in what a digital dollar should look like or how it might be issued. The reality is that we’re probably going to want to end up with something that’s a bit more pluralistic, having multiple versions of a digital dollar issued by multiple agencies, including the Treasury and maybe partially administered through the Postal Service.”

Grey sees an opportunity for the US to provide leadership on issues like how privacy will work with digital currencies.

“The specific details of what that means in the context of CBDCs is quite different to what it might mean for other forms of digital dollars,” he said. “At this point, at least, there isn’t clarity about exactly how important privacy is going to be compared to, for example, the need to trace payments and do know-your-customer (KYC) and anti-money laundering (AML) and things like that.”

Grey said he has some concern over the calls to expand the focus on AML because it’s not clear current AML efforts work very well. He pointed to a recent UN report indicating that there’s a large amount of money laundering going on within systems that already have KYC/AML regimes in place and that such surveillance hasn’t proven to be particularly effective.

He said he had heard that the EO would be framed mainly as a national security initiative. The fact that it isn’t, he said, is a credit to those in the Biden administration who walked the order back from a framework purely focused on national security.

Balance in a troubled world

Asked whether the EO strikes the right balance between retaining the qualities that have made cryptocurrencies popular and suppressing those that raise government concerns like sanctions avoidance, Grey suggested the ongoing Ukraine crisis shows some of the assumptions about digital currencies should be reconsidered.

“One of the things you’ve seen in this crisis is, in part, a repudiation of the strong case for how effective cryptocurrency can be,” he said. “In Russia, there’s no chance in hell that the entire country is going to be able to switch to cryptocurrency to get around the sanctions being placed on it. The question is only how individuals may be able to use it around the edges.”

The major cryptocurrency exchanges like Binance, Coinbase, and FTX are complying with sanctions, he said, adding that the role dark or unregulated currencies can be expected to play is going to remain fairly small.

“I think we saw that actually before Ukraine, with the trucker strike in Canada,” he said. “Even when people were able to send Bitcoin, what they weren’t able to do is actually cash it out … to make daily transactions.”

Grey said while there’s a possibility digital currencies will remain unregulated around the edges, the system is definitely entering a more regulated phase. The people he knows who are involved in the cryptocurrency industry, he said, see the glass as half-full.

“Even though the administration is cracking down on it, they’re cracking down on it because they’re recognizing its legitimacy and permanence,” he said. ®

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