The U.S. Moves on Crypto - March 13, 2022

We can all be forgiven to have perhaps not noticed in this week of war in Europe that President Biden made the boldest step yet on the position of the United States on the future of cryptocurrency. 

On March 9, 2022, the Executive Branch of the Federal Government of the United States ordered a study of how digital currencies can both benefit the economy and increase financial market risk. President Biden also signaled a willingness to create a Central Bank Digital Currency (CBDC). 

With the signing of an executive order, Biden mobilized federal regulators to assess the risks of a market that now approaches almost $2 Trillion. These include risks to consumers, investors, and the overall economy. 

Cryptocurrencies have experienced dramatic growth in the United States in just a few years. Large investments in marketing have led about 16% of American adults to have traded or invested in cryptocurrencies. National leaders are acknowledging that the industry has moved far quicker than has its potential regulators. Biden stated, “We must take strong steps to reduce the risks that digital assets could pose to consumers, investors, and business protections.” 

The White House now realizes that federal agencies must monitor cryptocurrencies’ impact on financial stability, national security, and climate change. This is a welcome addition to the federal government’s regulatory authority. Treasury Secretary Janet Yellen is also supporting greater regulatory measures that will allow the cryptocurrency industry to innovate more responsibly, while the nation also has the tools to combat illicit activity denominated in cryptocurrencies. 

While it may be counterintuitive to see the price of Bitcoin rally by 9% on the news, the dropping of this shoe reduces uncertainty with regard to the coin, and hence reduces at least one component of risk. With this reduction of risk as regulatory uncertainty declines, the value of Bitcoin is enhanced. 

This legitimacy will likely accelerate the pace of already substantial work for the Federal Reserve to create a CBDC. Indeed, they have been studying and creating white papers on how to create such a government-sponsored coin for some time, and many aspects of the coin have already been formulated in theory and simulated. This effort follows parallel and more advanced measures in China and elsewhere. 

Biden notes the compelling interest of sovereign nations to expand an affordable financial innovation that can reduce the cost of transactions and cross-border transfers safely and affordably, but risks to consumers and investors must be addressed. 

These consumer risks include identity theft, theft of assets, and the security of financial data in an industry that has to now defied cohesive regulation and does not insure the custodial funds it protects on behalf of its customers. Billions of dollars have been lost in the absence of appropriate protections. These losses as a share of the industry are much larger than that of traditional financial institutions. 

The United States especially identified the need for oversight to reduce the use of cryptocurrencies such as Bitcoin to harbor and hide illicit activities. Federal authorities recognize that such expanded oversight also has a global dimension, and the United States is prepared to offer global leadership to help coordinate international capital flows. 

Such leadership is laudable. As the White House notes, the promotion of safe and affordable financial services, as envisioned by Bitcoin’s creator, will allow greater and safer financial innovation that has the potential to increase the efficiency of financial transactions. At the same time, we must protect obvious vulnerabilities for our privacy, national security, climate change, and financial resiliency. This leadership shall, in the long run, enhance the success of cryptocurrency innovation, despite the reluctance of a decidedly libertarian cryptoculture to encourage or foster regulation. 

Beyond the obvious value of financial oversight to protect consumers and unsophisticated investors, the President’s backing of the creation of a CBDC, first voiced by former Federal Reserve Chairman decades ago, is certainly a significant advance. The President called for coordination of various agencies within 180 days to analyze the ramifications of economic growth from the creation of a CBDC. It also calls for study of how a public coin would interact with or affect private digital coins and potentially displace other payment systems and currencies. 

In addition, the U.S. harbors concerns over a CBDC’s implications on national security, financial crime, human rights, and the ability of the United States to project economic sanctions on nations when necessary. 

The United States cannot do this unilaterally. Coordination with its trading powers is necessary, and Biden promised to coordinate with the G7 nations and their finance ministers as the U.S. moves toward sponsoring a national digital coin. After all, when we consider miners and exchanges need little more than electricity and the Internet to operate anywhere in the world, squeezing the toothpaste tube one place merely creates a bulge in another. 

The crypto industry has a lot to offer, but it has also created disproportionate risks, to financial markets and the environment, that must be addressed if the industry is to become economically sustainable.