What a difference a year makes. On March 9, 2022, U.S. President Joe Biden’s office released its executive order on digital assets, marking the first official sign of a comprehensive approach to the regulation of the crypto ecosystem. At the time I and many others saw this as a very big deal, not least because of the strong signal that crypto had “arrived.” It was now significant enough to warrant attention from the leader of the world’s largest economy, and the surprisingly supportive tone of the document surely meant that a constructive regulatory approach was brewing. How wrong I was.
A year later, the supportive tone has pretty much disappeared. The comprehensive approach we hoped for turned out to be more of a threat than we anticipated, and the focus is now on erecting barriers rather than building a guiding framework. What happened in the interim?
Noelle Acheson is the former head of research at CoinDesk and Genesis Trading. This article is excerpted from her Crypto Is Macro Now newsletter, which focuses on the overlap between the shifting crypto and macro landscapes. These opinions are hers, and nothing she writes should be taken as investment advice.
Part of that answer is unfortunately obvious. The ball of fraud-fueled fire that was the collapse of the FTX crypto exchange in November was a spectacular embarrassment to not only crypto businesses that had confided in then-CEO Sam Bankman-Fried and his team. It was also an embarrassment to the politicians who had sat down with him, had posed for the photo-op and had entertained his ideas about crypto regulation. With a few brave exceptions, politicians understandably closed ranks and scrambled to distance themselves from anything to do with crypto risks.
But the shift is more complex than it might seem. Even before the FTX revelations, the tone from the Biden administration was more antagonistic. Absent from the executive order were calls for a clampdown; it was more about requesting investigation and reports, more about gathering information and ideas.
In September, the White House published an update, which mentioned the implosion of the Terra ecosystem in the first paragraph. Further down, the update stressed the loss of value in the market, how sellers “commonly” mislead consumers and how noncompliance with existing laws is still “widespread.” Already this was sounding very different.
The update also set out some White House recommendations, the first of which was that the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) “aggressively pursue investigations and enforcement actions against unlawful practices in the digital assets space.”
The second recommendation was that the Consumer Financial Protection Bureau (CFPB) and Federal Trade Commission (FTC) “redouble their efforts to monitor consumer complaints and to enforce against unfair, deceptive or abusive practices.”
The third was that agencies should “issue guidance and rules to address current and emergent risks in the digital asset ecosystem.” You get the drift.
The rest of the report emphasizes support of FedNow, the Federal Reserve’s instant payment network due to launch in mid-2023, as a solution for financial exclusion – in other words, the U.S. doesn’t need crypto payments efficiency, it has the Fed.
And then we have the official document released in January of this year, titled “The Administration’s Roadmap to Mitigate Cryptocurrencies’ Risks.” You almost don’t need to read it to know what it contains – the last sentence of the very first paragraph spelled it out: “As an administration, our focus is on continuing to ensure that cryptocurrencies cannot undermine financial stability, to protect investors, and to hold bad actors accountable.” The tone had moved from supportive to antagonistic to somewhat panicked.
But to blame the shift in the U.S. regulatory tone on crypto fraudsters is simplistic. Another significant change in the regulatory backdrop between the executive order and the two updates is the economic mood, and this is more significant than many realize.
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When the executive order was published, the Federal Reserve had not yet started its interest rate hiking campaign; it would kick this off with the first 25 basis point hike at the Federal Open Market Committee (FOMC) meeting the following week. The market knew rate hikes were coming. U.S. headline consumer price index (CPI) data showed inflation was rising rapidly, reaching 7.9% for February (this would be reported the following day) – but it was seriously underestimating how high it would go. The implied rate 12 months out, according to the fed funds futures market, was a now-laughable 2.87%.
At the time of the executive order, dark clouds were already building for equities. The S&P 500 was round 4270, 10% down year to date. By the time of the update in September, it had fallen almost another 10%,and tech company layoffs were starting to populate headlines. Understandably, with investors hurting, the government had to seem tough on risky, largely unregulated assets that had caused deep losses. In other words, the markets needed a “bad guy” to distract from what was shaping up to be a bleak scenario in all asset groups.
November delivered the ultimate “bad guy” as the FTX fraud shocked both the crypto ecosystem and mainstream observers. For a while it was an unwelcome distraction from a core inflation rate that had reached the highest level in four decades, a dollar that was at its highest relative to a basket of other currencies in two decades, and U.S. Treasury market volatility not seen since the Great Financial Crisis of 2008-2009. Things were looking bad on macroeconomic screens, but the crypto fallout presented Washington, D.C., with a problem it could show the world it was doing something about.
The current hostility is about more than the political satisfaction of prosecuting criminals, however. It’s a natural reaction to broader concerns. When times get bad we seek comfort, and new, complicated and disruptive technologies are never comfortable. When times get bad we instinctively magnify external threats, because that makes us feel more connected to our tribe. When times get bad we focus more on surviving today and less on building a productive tomorrow. When times get bad the leadership manuals tell us to act stronger than we feel in order to inspire trust.
On a more practical level, if the economy is about to enter a downturn, the Biden administration would probably prefer that businesses and individuals invest in more traditional, high-employment endeavors than in this newfangled notion that seeks to disintermediate national authority.
I’m not suggesting the administration’s hostility toward crypto assets is just for show. I do think that it is not just because of the brutal hits to investors over the past 10 months. It is also because of the darkening clouds over the U.S. economy.
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This has a silver lining. Just as administrations change, so do economic cycles. The antagonism is far from uniform – Thursday’s House Financial Services Committee hearing provocatively titled “Coincidence or Coordinated? The Administration’s Attack on the Digital Asset Ecosystem” is a case in point. There was a fair amount of skepticism and outright distrust among some lawmakers and one of the witnesses. But most of the witnesses and many of the elected officials present were eloquent advocates for clearer rules and a usable framework. All agreed that regulation was good, and most seemed to support the idea of market reform and the need to keep crypto business in the U.S.
Hearings rarely achieve anything in the short term but they are an opportunity to stick political stakes in the ground. The initial approach of the new House Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion is encouraging in its apparently critical take on current policy and political process. Its chair, Representative French Hill (R-Ark.) made a sharp point in his written statement after articulating the need to support innovation for the sake of leadership and competitiveness while ensuring appropriate controls and accountability:
“These are the administration’s own principles articulated in its Executive Order, though their recent actions seem to conflict with these principles.” (my emphasis)
Indeed they do. The White House might argue that recent industry events have shown that suppression of U.S. crypto activity is in Americans’ best interests. But this lamentable shift is about much more than protecting investors from fraud – it’s a reflexive reaction to the broader economic threats gathering on the rapidly approaching horizon. Because of that, we know this will pass, as all cycles do.
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