Relief and applause followed U.S. President Joe Biden’s executive order on crypto, issued Wednesday. The consensus of all the opinions in the aftermath is that the order represents a major milestone, a much sought-after acknowledgement of crypto’s legitimacy from the White House.
The positive reaction is no surprise given that the order contains something for both true believers and persistent skeptics. For example, vocal crypto advocate Ryan Selkis, the founder of Messari, tweeted that “the devil is in the details, but … it's about as good as it gets.” Meanwhile, perhaps the industry’s fiercest critic, Sen. Elizabeth Warren (D-Mass.), praised the order, saying that Biden is “right to spotlight crypto’s risks and we need strong rules before it’s too late.”
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We agree the executive order is an important milestone. But whether it promotes its stated objective of “innovation that works for all Americans, protects our national security interests and contributes to our economic competitiveness and growth” depends on the follow through.
The order establishes an executive branch working group and commissions around 21 reports. Approximately 13 of these reports focus on enforcement, while seven deal with a central bank digital currency (CBDC) and one addresses economic competitiveness.
An accompanying fact sheet describes the order as the “first ever, whole-of-government approach to addressing the risks and harnessing the benefits of digital assets and their underlying technology.”
Particular emphasis was given to highlighting the risks of “private sector-administered digital assets,” while elevating CBDC as a method of achieving payment systems benefits with fewer concerns.
A key element of any executive order is the follow-through. As background, the previous Trump administration had issued an executive order on financial regulation that resulted in the U.S. Treasury Department’s report on “nonbank financial, fintech, and innovation.” That report promoted innovation in financial services but, infamously, excluded cryptocurrency. However, lack of subsequent direction limited the report’s impact.
The coordination process established in the Biden order, led by National Security Advisor Jake Sullivan and the director of the U.S. National Economic Council, Brian Deese, involves more than 15 executive agencies. In addition, at least seven financial regulators are “invited” to participate, signaling their independence as they will not be required to contribute.
Already signs are emerging that cross-governmental action will be difficult. Senior officials commonly leave after two years, which puts pressure on Deese and Sullivan (and/or their successors) to direct the agencies and set meaningful policy now. This process may be affected by the coming midterm congressional elections.
See also: Crypto Is Too Big for Partisan Politics | Opinion
White House direction could help address two significant barriers to progress: the confirmation bias problem, or the tendency to filter information in a way that reinforces existing beliefs, and the territorialism problem, whereby regulators seek to expand their jurisdiction at the expense of others.
Public engagement in the process also matters. Over 40 million Americans, (according to the White House’s executive order, likely referencing a recent NYDig survey), reportedly own cryptocurrency, and their voices ought to influence the government’s official position.
Likewise, as one of us has written, there’s no substitute for hand-on experience when developing public policy. Policymakers need to find ways to get out of the Washington bubble, develop direct knowledge of the space and meet with the people actively building and using crypto products and services.
One striking difference between the order and the accompanying fact sheet is the emphasis on a CBDC. The order’s first topic is the issuance of a CBDC, a topic which is already being studied by various governmental agencies. The report assigned to the Treasury Department on the “Future of Money” emphasizes CBDCs, including specific questions to address. Additionally, the Attorney General must opine on the legality of a CBDC and draft potential legislation.
By contrast, the fact sheet lists CBDCs last, and its discussion as part of the “Future of Money” focuses only on financial inclusion, without mentioning legal analysis or proposed legislation regarding central bank digital currencies. Additional CBDC reports in the executive order include an Office of Science and Technology Policy report on CBDC infrastructure, and a Federal Reserve report on monetary policy and payment systems.
The majority of the reports required by the order relate to enforcement. The broadest of these is likely Treasury’s report with policy recommendations “to protect United States consumers, investors and businesses, and support expanding access to safe and affordable financial services.” The most impactful may be a joint U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) report on how their existing jurisdictions may address the risks of digital assets, and whether additional authority is needed. Other reports deal with illicit activity, financial stability, climate, privacy and consumer protection as well as competition.
The order introduces new players to digital asset regulation including the Federal Trade Commission and Consumer Financial Protection Bureau. While both agencies have commented on crypto in the past, they are now tasked with looking closer at the problems of privacy, consumer protection and competition.
It’s too early to speculate about what the CFPB might recommend in its report, but it’s notable that the consumer protection agency lacks historical expertise on “competition.” However, the agency’s current director comes from the FTC and may use the bureau’s “abusiveness” authority in an antitrust context. Notably, phrases like “disparate impact” and “unfair and deceptive practices” appear in the order.
It’s reasonable to anticipate tension between the CFPB and SEC, as the two agencies’ jurisdiction is exclusive in many respects.
Competition comes up again in the Department of Commerce’s planned report, a matter that industry innovators and leaders may welcome. The fact sheet describes this report as “Reinforcing U.S. Leadership in the Global Financial System,” or in other words, making the country competitive in the digital asset sector.
Clearly, the Biden administration fears international jurisdictions will adopt a more favorable regulatory framework for digital assets than the U.S. The order emphasizes that all countries follow the cryptocurrency dictates of the Financial Action Task Force (FATF) and Financial Stability Board. The White House is right to be concerned on this front, as adoption of FATF’s proposed “travel rule” has been conspicuously slow.
Many jurisdictions would love to seize the future of financial services from the United States, and it’s uncertain whether the administration has the leverage to prevent this arbitrage.
It’s notable that the Commerce Department will author the competition report, as global finance would traditionally be the Treasury Department’s domain. Treasury loosely attempts to direct financial regulators through the Financial Stability Oversight Council. By contrast, Commerce cannot claim any authority over financial regulators. So this report is unlikely to resolve key regulatory uncertainties around the SEC’s or CFTC’s domain.
Running the race
Of course, there are other notable omissions. First, there is no mention of the Internal Revenue Service (IRS). This is surprising, particularly given the ambiguous tax reporting provisions included within the administration’s signature legislative achievement (the Bipartisan Infrastructure Law).
Second, there is no mention of state regulators or regulation – though that’s often overlooked by federal officials.
Third, the President’s Working Group Report on Stablecoins does not appear, leading one to wonder about its status.
See also: The Urgent Need for Regulatory Clarity on Stablecoins | Opinion
Finally, there was a missed opportunity to reference the President’s Executive Order on “Promoting Competition in the American Economy,” given digital assets’ potential to reduce existing market concentration in financial services.
One unnamed source close to the executive order described the much-awaited document as the starting gun of a race. If so, then innovators need to be in the race to win it. Most reports are scheduled to be issued around Labor Day, when the midterm election season heats up. In addition to engaging with agencies over the summer, innovators need to be ready for autumn hearings and a new congressional session in 2023. It’s time to lace up the running shoes and get ready.