President Joseph R. Biden’s executive order on digital asset regulation, released barely a week ago, is the White House’s first public involvement in the tangle of concerns surrounding cryptocurrencies, blockchain, central bank digital money, and decentralized finance.
Those in the crypto sector who feared a regulatory attack on a threat to conventional financial institutions are breathing a sigh of relief. Those hoping for a clash between centralized control and decentralized innovation may be let down. But make no mistake: the executive action is a significant step forward.
The paper outlines five key aspects. Three will get the most attention, but the other two will be the most affected by White House action.
The first component advocates putting digital assets into the fabric of the financial regulatory system, which attempts to safeguard investors while simultaneously encouraging capital development. In the United States, critical concerns surrounding digital assets now need adequately clear answers: What activities include securities and, as a result, the Securities and Exchange Commission? What should be done about non-securities-related activities? How should exchanges of digital assets and lending platforms be regulated? How can banks or other regulated financial organizations interact with or retain digital assets in custody?
Real progress on digital asset regulation would need action by the alphabet soup of federal financial regulatory agencies—SEC, CFTC, OCC, FDIC, Fed, CFPB, FinCEN, OFAC, IRS—as well as, most likely, legislative action. However, the executive order lends the White House’s weight to these initiatives.
Similarly, financial sanctions imposed on Russia in response to its invasion of Ukraine, as well as the arrest of two Americans for laundering billions of dollars in bitcoin, have focused attention on the illicit financing and national security implications of digital assets. From the start, it has been apparent that cryptocurrencies, which are recorded on public ledgers and often held at exchanges that are possible points of interdiction, do not provide criminals and rogue nations a “get out of jail free” pass. However, questions remain regarding how to secure an acceptable amount of monitoring and enforcement while without jeopardizing financial privacy or reducing efficiency gains. The executive order supports a more balanced viewpoint, as well as a greater emphasis on resolving current damages.
The executive order’s second goal is to promote and sustain US competitiveness in a global financial system where digital assets are becoming more essential. The executive order, in particular, “places the highest priority on research and development activities” into a prospective U.S. central bank digital currency (CBDC). Since China unveiled its digital currency research project in 2017, which resulted in the country’s e-CNY “digital yuan,” there has been widespread fear that the dollar’s worldwide supremacy is under danger. The Federal Reserve Bank of Boston collaborated with the MIT Digital Currency Initiative to create a CBDC proof of concept. However, the United States lags behind China, England, and the European Union in researching how a CBDC may overcome the limits of current payment rails and establish a new framework for monetary policy.
The presidential order, properly, does not commit the United States to a specific course of action. CBDCs are not a race that will be won by those who are the first out of the starting gate. The United States, on the other hand, cannot afford to hand up the reinvention of currencies for the networked digital era to other countries.
The presidential order’s third section addresses financial stability and systemic risk. The macroprudential paradigm of financial regulation, which prioritizes systemic resilience, is worth replicating in analogous situations, as David Zaring and I argue in a forthcoming law review article. The digital asset sector is distinct from typical financial marketplace sectors in that everything does not pass via centralized control points. However, it is possible that it is not that dissimilar. Most digital asset holdings are highly concentrated, and a small number of players wield enormous market influence. Because decentralized banking systems are interoperable and programmable, connectivity may introduce major hidden hazards.
The executive order instructs the Financial Stability Oversight Council, an interagency group established by the Dodd-Frank Wall Street Reform and Consumer Protection Act, to address systemic risks posed by digital assets. This instruction, more than anything else, illustrates the sector’s development and progress. Only a few years ago, central banks disregarded digital assets as being too tiny and unconnected to the rest of the financial system to pose systemic threats.
The remaining two provisions of the executive order will get the least attention. Nonetheless, they are important to the further growth of the digital asset market.
Financial inclusion is the fourth important pillar. Proponents of digital assets say that they improve access to financial services for retail investors, typical consumers, and disadvantaged populations. Individuals may get more control and ownership of digital assets by removing restrictions imposed by banks and other entities. Similarly, non-fungible tokens may enable better routes for artists to communicate with their fans. Nonetheless, these disadvantaged people are nonetheless prone to frauds, hacks, and secret arrangements. The presidential order puts the United States on record as encouraging the inclusion of digital assets as a national goal.
Finally, it is easy to overlook the fact that, despite the magnitude of digital asset trading marketplaces, the underlying technology is still in its infancy. Major blockchain networks are not scalable, safe, or interoperable enough. Important infrastructural pieces relating to digital identification and governance are still in their infancy. And the energy consumption of mining for cryptocurrency networks such as Bitcoin is becoming a major source of worry all around the globe.
In sponsoring research and fostering standards creation, the European Union and China are ahead of the United States, just as they are in other vital fields such as artificial intelligence. The executive order enlists non-regulatory components of the federal government, including as the National Science Foundation and the White House Office of Science and Technology Policy, to promote technological developments in digital assets and blockchain technology.
The executive order is just the beginning. However, it is critical to acknowledge the challenge in reaching the starting line. Herding the essential cats is a tremendous task when there are so many agencies, perspectives, and personalities involved. Engaging the President and other senior authorities in the midst of a worldwide epidemic and now a war in Europe adds to the complexity. The wording of the executive order is primarily calls for research and the formation of working groups, but that is how the federal government’s public policy machinery operates.
Saber-rattling comments by agency chiefs and lawmakers may get more attention. Nonetheless, this executive action marks a watershed moment. It will raise digital assets to the level of public policy concern, compelling all relevant components of the federal government to participate.