Introduction
With the market cap of cryptocurrencies exploding from $14 billion to $3 trillion between 2016 and 2021, it’s long been expected that the United States would eventually have to pay greater regulatory attention to the sector. This has indeed been the case since 2020, with the SEC, FinCEN and CFTC targeting and charging crypto companies and individuals who were, in their view, transgressing US regulations and laws, such as Ripple and exchanges like BitMEX. Many participants in the crypto space had been fearing a regulatory onslaught from the US government, with decisions like the one to partially fund Biden’s infrastructure bill with poorly planned taxes on crypto traders as well as rumored stablecoin regulations fueling these concerns.
Despite these ominous signals, the crypto community was in for a pleasant surprise on March 9, when the White House announced its new executive order on digital assets. The order outlines priorities for regulatory development, assigning frameworks to be delivered in six months and a full report in one year. Inside the industry, the order has been mostly well-received, even causing Bitcoin’s price to spike by 9%.
With elections around the corner and apparently 25% of US households owning Bitcoin, as well as a significant portion of BTC hashpower now residing on American soil thanks to China’s ill-fated Bitcoin mining ban, should we really be so surprised by this U-turn on crypto?
Let’s take a look at what’s in Biden’s executive order (EO) and what it means for crypto going forward.
Biden’s crypto executive order: basic facts
The crypto EO is primarily just an indicator of where the American regulations are likely to be concentrated under the Biden presidency. It is not actually a law, and it declines to state in detail what any future law will resemble. All the EO provides is clarity on where the administration is paying attention. The actual legislative package will still have to make it through Congress, where it will presumably land in 2023.
Consumer protection and financial stability with crypto
Given that ransomware attacks, exchange hacks, and other failures of cybersecurity are on the rise, the administration is understandably concerned with protecting consumers, investors, and businesses. It’s safe to say the Biden administration is contemplating some kind of regulation for cybersecurity standards, possibly with a focus on centralized exchanges.
The administration is also signaling concerns over the danger posed to the wider financial system by exponential growth in digital asset markets. It wants to regulate these in a similar manner to traditional finance but does not exclude the possibility of going even further to tailor rules specific to crypto.
AML and crypto’s “sunrise problem”
At the moment, the crypto industry is being undermined by stalled regulation and overly lax enforcement across many jurisdictions. Anti-money laundering (AML) solutions such as the Financial Action Task Force’s (FATF) Crypto Travel Rule, which requires disclosure of personal details on transfers over $1,000, are not yet fully in place. Although the global regulator has issued recommendations and most crypto-relevant countries have agreed to comply, timelines for implementation vary greatly.
As long as there continues to be holes in this particular net, we will still have to endure what is known as the “sunrise problem,” with crypto being laundered through loose jurisdictions. While the Biden team may not have much in its toolkit to accelerate international progress on this issue, it does appear to be labeling decentralized finance (DeFi) as a point of interest for AML regulations.
Bitcoin mining in the US
Here it’s clear that the US, which is responsible for around 35% of the Bitcoin mining power worldwide, is concerned about the demands placed on energy usage by proof-of-work (PoW) crypto mining. The EO specifically mentions climate concerns in its discussion of the issue. With the Bitcoin hash rate continuing to go up and the EU even considering an outright ban on mining, it seems reasonable to assume the area may be in for regulatory scrutiny in the US too.
American financial and tech stewardship in the crypto era
The Biden administration is directing the Department of Commerce to set up a framework across the government to help drive US competitiveness and leadership in the crypto sphere. This is being interpreted by the industry as a sign that the US is serious about not letting overzealous bureaucrats smother crypto innovation and drive it abroad.
The EO states that the country “derives significant economic and national security benefits” from the central role the US dollar plays in the international system, and it makes it seem like the administration wants to leverage crypto to continue that dominance.
American CBDC
As of March 2022, over 100 countries were in the process of researching central bank digital currencies (CBDC). Until now, although some small pilot programs had been underway in the country, the US had seemed like a latecomer to the field. Now it’s clear that the Biden administration is getting serious about CBDCs, with the EO assigning the Treasury Department to research the issue and proceed with development if it’s deemed in the national interest. Expect conclusions from the administration on whether to create a CBDC toward the end of this year.
The Verdict
With crypto world currently looking to onboard its next billion users, regulatory clarity is likely only going to increase its appeal. Institutional investors in particular will welcome anything that may reduce volatility, make the situation around taxes clearer, and reduce security liabilities around issues like hacks. The general feeling that the Biden administration is not anti-crypto, as has been confirmed in the minds of many by the EO, is a step in the right direction for continued development and adoption in the US.
Similarly, the fact that the US seems to be taking a whole-of-government approach rather than a scattershot one will help to lessen uncertainty for institutional investors. While nothing has been fully ironed out yet, it seems clear that the Biden administration is acknowledging that crypto is here to stay – and that it wants to remain on the right side of it.