Joe Biden's Executive Order: What's It Mean for Crypto?
Will crypto regulation be good or bad for the U.S. financial system?
In the last few days, we’ve heard a lot about an executive order that President Joe Biden signed on Wednesday regarding digital assets. Is this a good thing or a bad thing?
First, let’s keep in mind that the category of “digital assets” is broader than the category of cryptocurrencies. It also encompasses NFTs, crypto derivatives such as ETFs, tokenized assets, and could even include non-crypto and non-blockchain-based digital files. That may include digital music and other forms of digital entertainment. Keeping that in mind, what impact could the president’s executive order have on the crypto ecosystem?
What Does the Executive Order Have to Say?
First, let’s discuss what the executive order actually says? The second paragraph of the order reads (emphasis on bold text is mine):
The rise in digital assets creates an opportunity to reinforce American leadership in the global financial system and at the technological frontier, but also has substantial implications for consumer protection, financial stability, national security, and climate risk.
What I find interesting about this four-point list is that, beside consumer protection and financial stability, the usual rationale for any kind of financial regulation, the executive order places national security and climate risk. These are included for, I think, obvious reasons. The Democrats want to influence any technology that poses the remotest potential to climate risk, and bitcoin’s impact on the environment has already been identified. With regard to national security, that’s simply code for “we want to use digital assets to sanction other countries with whom we have differences.” The recent attempt to sanction Russia using cryptocurrencies is a prime example of this intent.
Reading further into the executive order, one finds this sentence (again, the emphases are mine):
The Order lays out a national policy for digital assets across six key priorities: consumer and investor protection; financial stability; illicit finance; U.S. leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation.
It is these six priorities that are the meat and potatoes of the executive order. Plus, a seventh priority is added to explore a U.S. Central Bank Digital Currency (CBDC).
Now, what are the implications of regulation concerning these six priorities of Biden’s executive order?
How the President’s Executive Order Could Impact Crypto
Let’s take the president’s seven priorities and discuss them one by one:
Consumer and Investor Protection - I’ve been saying all along that regulation was coming, sooner or later. Regulating crypto in the interest of protecting consumers and investors is consistent with the U.S. government’s stance on other financial markets such as securities. The Securities Act of 1933 came about after the Great Depression and the wildly corrupt 1920s. The Securities and Exchange Commission (SEC) has already targeted crypto companies—Ripple being the most prominent—with charges of violating securities laws. Clearer rules regarding cryptocurrencies and digital assets would make the nation’s consumer and investor protection stance easier to implement and reduce any confusion or uncertainty about what is lawful. This would be good for consumers, although if regulators include too many restrictions, it could shut some people out of the crypto ecosystem who invest in crypto because they can’t afford to invest in traditional securities.
Financial Stability - Clearer regulations could reduce volatility in crypto markets. However, that is not what the Biden Administration has in mind. Rather, I believe the concern is that crypto markets could destabilize the fiat economy. This was the major concern with Facebook’s plans to introduce a cryptocurrency called Libra (and, later, Diem). In essence, U.S. leaders want to protect the U.S. dollar. What that means for crypto is suppressing it so that it doesn’t overtake the U.S. dollar as the international standard of currency. While I believe the government has a natural right to protect its currency, I don’t believe in inhibiting the freedom of its citizens to interact with the currency of their choice. Unfortunately, those with the power to de-power others will always exercise their power when “the others” appear to be a threat. In this case, the target is crypto.
Illicit Finance - Those who make the laws get to define what is illicit. It’s easy to see that rug pulls and pumps-and-dumps should be dealt with. My concern is whether any regulation of crypto goes beyond the reasonable attempt to deal with obvious harmful activity and targets legitimate decentralized finance (DeFi) activities. Let’s hope adopted regulations do not move into the overreach category.
Global Economic System and Economic Competitiveness - This one has me concerned. The U.S. is already an economic leader due to the prominence of the U.S. dollar. I think the fear for U.S. leaders is that bitcoin or other cryptocurrencies could potentially replace the U.S. dollar as the leading currency of the world. That’s a viable concern. However, that should be a consumer choice. If more people put trust in bitcoin, then it should be the international standard for currencies. The organization of the European Union and the rise of emerging powers around the world have already caused a decline in superpower status of the U.S. Of course, these are elements beyond U.S. control. In order to maintain its status as the world’s most powerful nation, the U.S. must remain the leading economic power. Therefore, national leaders are very interested in doing everything they can do to maintain that posture—including suppressing the power of cryptocurrencies through legislative and regulatory efforts. In other words, if the U.S. can control the influence of cryptocurrencies by legitimizing their existence, they hedge their own economic power and leadership status as the world’s foremost economy.
Financial Inclusion - Financial inclusion is a buzzword that means “bringing more people into the recognized financial system.” In essence, the government doesn’t like competition. Financial technology (fintech) has already impacted financial inclusion by offering services to people who, before, were shut out of the world’s established financial system. Cryptocurrencies and digital assets more often work outside of that system to include those who are shut out of the world’s established financial system. I believe a part of the Biden Administration’s intent is to channel those who have been shut out of the financial system into it by controlling the narrative on cryptocurrencies.
Responsible Innovation - There’s no doubt that cryptocurrency and blockchain entrepreneurs have been innovative in their developments. Most of it has been good. However, there have been some failed attempts at innovation in the crypto space. And some of it has been disastrous. One area where potential harm could be done unintentionally is in the area of smart contracts. I see a future regulatory system that requires smart contract audits prior to implementation. As long as potential regulation attempts to curb the negative side of failed innovation efforts without impeding positive innovations, then this could be a good thing. So many times, however, legislators and regulators go too far in their attempts to drive responsible innovation.
CBDC - Finally, the order to prioritize an assessment of “technological infrastructure and capacity” for a U.S. CBDC hints at a possible attempt to provide a digital dollar and phase out, over time, paper currency and coinage. This could actually be good for other cryptocurrencies. Instead of outlawing non-CBDC cryptocurrencies and digital assets, the U.S. could provide a digital dollar as a matter of choice for consumers. Of course, a CBDC could have a negative impact on stablecoins. It’s likely that a digital dollar could become the stablecoin of choice for consumers committed to the world economic system. In some ways, it could strengthen the dollar as citizens of other countries could more easily obtain a U.S. CBDC than U.S. fiat currency. On the other hand, a U.S. CBDC would still be inflationary, and that’s bad for consumers—especially low-income earners.
President Biden’s executive order on digital assets is a mixed bag. In some ways, it could benefit the crypto ecosystem. In other ways, it could have a negative impact. At any rate, we will have to wait and see regarding how regulation is implemented, because the how will determine the final results.
Cryptocracy is a decentralized newsletter published 4 times a week. I curate the latest news and crypto analysis from some of the brightest minds in crypto, and sometimes offer a little insightful and snarky commentary. Always fresh, always interesting, and always crypto.
First published at Cryptocracy. Not to be construed as financial advice.