Biden Administration Digital Asset Executive Order: What does it mean for U.S. competitiveness?
Credit: CryptoSlate
In March of 2022, the Biden Administration released a long-anticipated executive order regarding the potential regulation and implications of digital assets and their underlying technologies including blockchain technology, also referred to by many as distributed ledger technologies or DLTs. The cryptocurrency and blockchain industry has now surpassed a three trillion-dollar market cap, with a large number of American investors and innovators participating in the development of these emerging technologies. Blockchain technology has also increasingly shown up as a tool being utilized by individuals, entities, and governments to facilitate the transfer of data through the power of encryption without a central point of failure.
While the executive order doesn’t specify any policy recommendations or prescriptions surrounding Blockchain Technology this is still the most significant regulatory development regarding cryptocurrency and blockchain technology at the Executive level of the US government. The White House has stated their hope is that this emerging technology would require a “whole of government approach” to the regulation of digital assets and blockchain technology.
This historic executive action by President Biden has drawn widespread praise and criticism from the blockchain ecosystem. However, those who are skeptical of blockchain technology and cryptocurrency argue that the executive order doesn't go far enough to expand the government regulatory power over these industries. Electric Coin Company, the non-profit behind the blockchain network for the cryptocurrency Z-Cash, went as far to release a statement on their website saying the order was a “widely acknowledged as a watershed moment for the crypto industry.”
The Chamber Digital of Digital Commerce, a group representing the broader U.S. digital asset industry, said in a statement “Today’s Executive Order on Ensuring Responsible Development of Digital Assets represents a much-needed step toward putting in place coordinated and comprehensive policies that will support the growth of the U.S.-based blockchain and digital asset markets and put in place the necessary rules of the road that protect consumers, investors, and innovators alike.”
The Blockchain Association, a trade association representing the blockchain industry, put out a statement saying “The White House’s directive to coordinate oversight is further proof that the crypto ecosystem is now a vital and inseparable part of the national economy.[...] By working alongside the crypto ecosystem and having an open and productive dialogue with industry, the Biden Administration has the opportunity to work with the industry and ensure America remains the global leader for technological innovation for years to come”
Critics go on to say that the language of the order is naive on the beneficial prospects posed by blockchain technology for the United States. The reality is somewhere in between, with the President’s executive order focusing more time than ever before on potential benefits, use-cases, and U.S. competitiveness than any action from the Executive Branch so far. However, those who pride themselves on their opposition to cryptocurrency support a strict regulatory regime. Noticeably it has become more apparent that the regulatory policies proposed by these critics tend to benefit certain powerful organizations and companies within the existing financial sector.
The President and CEO of the Independent Community Bankers of America (ICBA), Rebecca Rainey, said “Harmonizing digital asset regulations will ensure consistent oversight of cryptocurrency service providers, establish clear guidelines for permissible bank activities, and avoid gaps to minimize the risk of regulatory arbitrage. Unregulated cryptocurrency would disinter-mediate community banks, undermining their ability to support local customers and communities while threatening consumer privacy and protections as well as financial stability.”
The threat of the disintermediation of finance has been of an increasing level of concern among the banking industry groups, who also share the ICBA’s concerns that cryptocurrency could pose a threat to their business. The American Bankers Association’s CEO put out a statement expressing support for the President’s move to regulate digital assets and cryptocurrency saying “America’s banks remain at the leading edge of payments innovation including real-time payment options already available today. Banks are also quickly and responsibly integrating digital asset offerings, giving consumers access to these new products from a regulated provider they can trust.”.
Some in academia are also against the President’s order to explore potential benefits and use-cases provided by the technology underlying digital assets. Hillary Allen, a Law Professor at American University Washington College of Law, has recently made a name for herself as a crypto-critic in certain circles in academia.
The issue with this criticism is that their solutions utilize outdated regulation of securities and commodities regulation that was written in the early 20th century and attempt to apply it to a new and completely revolutionary class of assets. Allen went on to say of Biden’s order, “But is a crypto-financial system one that we want? What do we risk by putting a stamp of approval on it?” (Allen). She also went on to make analogies to the 2008 recession and critiqued cryptocurrency mining for energy use, which she failed to acknowledge is only used by a small number of blockchain networks to power the consensus mechanism known as proof-of-work (POW).
She then continued on to remark that “the Biden administration should worry less about nurturing financial innovation per se and focus more on interrogating industry claims about crypto’s potential to promote financial inclusion.” (Allen) defying the findings of a 2020 report by the Congressional Black Caucus that found cryptocurrency is already driving financial inclusion among unbanked and underbanked minority communities.
Similar to the early debate around internet regulation, many of the more extreme hawks in academia will likely fail due to an American spirit of innovation and excellence. The cognitive dissonance overshadowing these emerging technologies will be overcome as the industry continues to come into the regulatory fold and begins to become utilized by the U.S. government to achieve its strategic objectives of spreading our values on the world stage.
Although the order is a step in the right direction, it has not called for any significant steps to directly implement the technology or policy actions to bring some type of regulatory clarity. This means that Congress will likely still be required to act to fully implement a regulatory regime for blockchain technology and cryptocurrencies. The executive order has seven stated policy objectives.
The first objective of the executive order is to “Protect U.S. Consumers, Investors, and Businesses”, and even more specifically the executive order “directs Treasury and other agencies to assess and develop policy recommendations to address the implications of the growing digital asset sector and changes in financial markets for consumers, investors, businesses, and equitable economic growth”. Establishing a regulatory framework that promotes responsible innovation and regulatory clarity for innovators would be a huge step forward as currently there is a patchwork of different regulators all vying to be the tip regulator for crypto.
The second objective is to “Protect U.S. & Global Financial Stability and Mitigate Systemic Risk”. For this objective, the order “encourages the Financial Stability Oversight Council to identify and mitigate economy-wide financial risks posed by digital assets and to develop appropriate policy recommendations to address any regulatory gaps”.
The third objective is to “Mitigate the Illicit Finance & National Security Risks Posed by the Illicit Use of Digital Assets”. To do this, the administration has directed “agencies to work with our allies and partners to ensure international frameworks, capabilities, and partnerships are aligned and responsive to risks.”
The fourth objective is to “promote U.S. Leadership in Technology & Economic Competitiveness to Reinforce U.S. Leadership in the Global Financial System by directing the Department of Commerce to work across the U.S. Government in establishing a framework to drive U.S. competitiveness and leadership in, and leveraging of digital asset technologies' '. That section specifically has been applauded by some Blockchain industry groups and Crypto executives as an affirmation that the federal government is serious about providing this new industry with regulatory clarity, given the fact that many blockchain and crypto projects and startup often decide to launch overseas due the lack of regulatory clarity and perceived support by the US government for these emerging industries.
The fifth objective is to “Promote Equitable Access to Safe and Affordable Financial Services”. The sixth objective is to “Support Technological Advances and Ensure Responsible Development and Use of Digital Assets”. The seventh and final objective is to “Explore a U.S. Central Bank Digital Currency (CBDC)”. CBDCs have been of increased interest to the US government due to China’s push to expand their use of the Yuan in international settlements using their digital currency, E-CNY. Although many of these goals are broad and non-specific in terms of policy recommendations, the focus on U.S. competitiveness has been welcomed by many in the blockchain and cryptocurrency industry.
With any new and emerging technology, there usually is a clear friction between regulators who are tasked with maintaining a certain order and the innovators who live by the phrase “move fast and break things.” This remains a defining feature of the policy debates and discussions on how to regulate a new and disruptive technology that simultaneously pose both benefits and potential risks.
The studies and reports ordered by the President could lead to some significant developments in the understanding of these emerging technologies in the Federal bureaucracy. However, this also may have some negative effects on the U.S. leadership in blockchain technology and digital assets. This is due to the fact some of the agencies named to be tasked with producing these recommendations could directly or indirectly hinder American innovation and offshore American innovators depending on the regulatory policy they pursue.
Such an exodus of innovators could lead them into the arms of our foreign adversaries'. This has already led to technology being developed to benefit authoritarian regimes such as China with their Blockchain Service Network or BSN. This policy area has been deemed to be important to tackle for reasons of national security and economic competitiveness. But, it is yet to be seen if each executive agency will share the President’s interest in embracing the potential benefits these innovations could bring to the United States given previous statements made by some of its top regulators.
The information on cryptocurrency being given to the Executive Branch and Capitol Hill by banking lobby groups such as the American Banking Association is extremely misleading and advocates for a regulatory regime where banks are the only legal custodian of any funds stored on blockchains in the United States. However this regulatory strategy undermines the very nature and potential benefits of cryptocurrency because of its ability to self-custody and utilize code to govern transactions.
The goal of this strategy is to preserve the status quo and not allow for this new disruptive technology to challenge the certain financial players. In the case of cryptocurrency regulation, the decentralized blockchain networks that underpin many of the tokens being invested in and speculated on are a direct threat to middlemen on Wall Street due to the programmability, security, and potential it poses for transparency.
A wide majority of investment products or crypto-services are not available to Americans due to the strict rules and regulations associated with financial regulation. Securities and commodities laws are taking up a large portion of the conversation due to the fact that institutional investors are looking to speculate in new ways, and are also willing to spend the money or resources lobbying for their preferred framework. A major example is a Bitcoin spot ETF which is a fund composed of pooled bitcoin holdings managed as a publicly traded fund.
Investing in a Bitcoin ETF is different from buying trading bitcoin, bitcoin futures, and bitcoin futures ETFs which have currently been given the green light by the Securities Exchange Commission. In Canada and Europe, regulated Bitcoin ETFs are required to disclose the holdings of the wallet addresses which make up the fund's value. Other examples of financial products available to foreigners but not Americans include crypto-derivatives and initial coin offerings (ICOs) which present different levels of risk that regulators and policymakers have to take into account.
These policy discussions have already been taking place at the agency level, most notably the Securities Exchange Commission which oversees the trading of securities including publicly traded and some privately traded stocks. The executive order mentioned the need to ensure the U.S. remains competitive in innovation, not just in financial markets, but in real-world use-cases that are of potential concern to the United State’s national security interests. Earlier this year the National Security Council named digital assets, distributed ledger technology, and blockchain technology as Critical Emerging Technologies alongside quantum computing and AI.
The Biden Administration was seen by some in the industry as a welcome sign for the blockchain and cryptocurrency industry as some in the Trump administration were vocally anti-crypto, most notably former Secretary of the Treasury, Steven Mnuchin, and Former Chairman of the SEC, Jay Clayton. Even the former President himself has said how he feels negatively about cryptocurrencies, although his wife Melania, daughter Tiffany, and son-in-law Jared Kushner have later become active with their own interests in blockchain technology.
Former Senior Advisor to President Trump Jared Kushner said in an email exchange with Steven Mnuchin uncovered through a FOIA request on the topic of digital assets and stablecoins, “My sense is it could make sense and also be something that could ultimately change the way we payout entitlements as well saving us a ton in waste fraud and also in transaction costs,” (Ian Allison).
Another pro-crypto member of the Trump Administration was Brian Brooks who served as the Comptroller of the Currency (OCC) which oversees the regulation of federally chartered banks. Brooks put out a series of interpretive letters allowing banks to have custody of digital assets and connect to blockchain networks before the end of his tenure.
When President Biden nominated former CFTC Chairman Gary Gensler to become SEC Chairman, many in the industry were overjoyed and filled with optimism due to the fact that Gensler taught a course on bitcoin at MIT and has made positive statements before his nomination. Early on in Chairman Gensler's nomination process, many who support crypto watched his MIT course recordings which revealed a very siloed view of how digital assets should be regulated.
If Chairman Gensler has his way with the development of further regulation, almost all data tokenized on a blockchain that can be fractionalized is under threat of being targeted by the SEC, as a potentially unlawful securities offering. That would seem to be at odds with the White House’s push to ensure a regulatory framework that promotes U.S. leadership and values in the development of these emerging technologies.
Many involved in DC financial regulation and financial technology (FinTech) policy circles also knew of Gensler’s historic stint at the Commodities Futures Trade Commission (CFTC) which earned him a position as a feared regulator on Wall Street who put the CFTC on the map in comparison to the SEC which was historically charged with regulating stocks while the CFTC focused on the commodities markets.
This changed when Gary Gensler was able to convince lawmakers that the CFTC was the agency tasked with regulating derivatives which were widely believed to be under the purview of the SEC due to the fact that many directives were securities. He later went on to work for Goldman Sachs where he watched his attempted regulation of derivatives backfire into a catastrophic economic recession that had severe consequences for all aspects of American life.
The executive order has received praise from some members of the U.S. House of Representatives and the U.S. Senate, with bipartisan support for the mentions of potential benefits of blockchain innovation for the United States as a matter of national security. Senator Pat Toomey (R-PA) who is the Ranking Member of the Senate Banking Committee said this of Biden’s executive order: “I’m encouraged to see the Biden administration acknowledge that digital assets, including cryptocurrencies and the underlying technology, have tremendous potential benefits. As the White House, itself stated, the U.S. must maintain its leadership in this space, which is why lawmakers and regulators should do nothing to harm America’s longstanding tradition of fostering technological innovation.”.
Chairman of the Senate Banking Committee, Sherrod Brown (D-OH), in a statement, said “The President is right to take a whole-of-government approach to addressing cryptocurrencies and considering a central bank digital currency. I look forward to working with the Administration and my colleagues in Congress to protect consumers, expand financial inclusion, and safeguard our national security.”
Ron Wyden, a Democratic Senator from Oregon also echoed similar remarks saying “There is obviously a debate [about stricter regulation], but I want to be on the side of the innovator. I keep looking for innovations. That’s where my heart lies.” These signs of or rare bipartisanship are welcome signs for the rapidly growing, but still maturing blockchain industry.
Chairwoman of the House Financial Services Committee, Congresswoman Maxine Waters (D-CA), said in a press release, “President Biden’s Executive Order on digital assets is an important step in furthering our understanding of how cryptocurrencies and other digital assets will shape the future of our financial system and of our society.” The increased interest in establishing a regulatory framework for digital assets, cryptocurrencies, and blockchain technology have been accelerated ever since the White House unveiled its order back in March.
Chairwoman Waters and Ranking Member Patrick McHenry (R-NC) held a series of bipartisan hearings on the regulation of dollar-backed stablecoins and the broader regulation of digital assets. The House Financial Services Committee has worked hard to facilitate a culture of non-partisanship when it comes to these issues, with champions on both sides of the aisle working together to draft legislation that mitigates risks while protecting America’s competitive edge in innovation and finance.
This Executive Order has also given some congressional Democrats the green light to take this policy area on in a non-partisan manner, which is a welcome development due to the fact some Republicans have tried to position crypto and blockchain as a partisan issue for the GOP. Progressive Congressman Darren Soto (D-FL), Ro Khanna (D-CA), Jake Auchinclaus (D-MA), and Ritchie Torres (D-NY) have all emerged as champions of crypto and blockchain technology in the House over this past year.
The reports required by the executive order cover a wide range of topics ranging from a United States digital dollar to the use of distributed ledger technology to enhance transparency in the federal government. They will likely come to different conclusions on how and what should be regulated with regard to digital assets. The need for regulatory clarity has been echoed constantly by the industry and traditional financial institutions alike. For the first time in U.S. history, leaders at the highest levels of American politics are faced with the dilemma of regulating something so new, transformative, and potentially critical for use-cases that can benefit the nation. The question remains, who will act first: Congress or the Executive Branch?
