RJoy and applause followed US President Joe Biden’s executive order on crypto, released on Wednesday. The consensus of all opinions in the aftermath is that the order represents a major milestone, a much-sought acknowledgment of the legitimacy of crypto from the White House.
The positive reaction is no surprise given that the order contains something for 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.), rented the order, saying Biden is “right to shine a light on the risks of crypto and we need tough rules before it’s too late.”
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We agree that the Executive Order is an important step. But whether it promotes its stated goal of “innovation that works for all Americans, protects our national security interests, and contributes to our economic competitiveness and growth” depends on follow-up.
The order establishes an executive task force and commissions approximately 21 reports. About 13 of these reports relate to law enforcement, while seven deal with a central bank digital currency (CBDC) and one deals with economic competitiveness.
An accompanying factsheet 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 has been placed on highlighting the risks of “privately administered digital assets,” while making the CBDC a method to achieve the benefits of payment systems with less hassle.
A key part of any executive order is follow-up. As a backdrop, the previous Trump administration issued an executive order on financial regulation that culminated in the US Treasury Department’s report on “non-banking finance, fintech, and innovation.” This report encouraged innovation in financial services but, infamously, excluded cryptocurrency. However, the lack of further guidance limited the impact of the report.
The coordination process established in the Biden order, led by National Security Advisor Jake Sullivan and the Director of the United States 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 since they will not be required to contribute.
Signs are already beginning to appear that intergovernmental action will be difficult. Senior officials typically leave after two years, which puts pressure on Deese and Sullivan (and/or their successors) to run the agencies and set meaningful policy now. This process could be affected by the upcoming mid-term legislative elections.
See also: Crypto is too big for partisan politics | Opinion
The White House leadership could help address two significant obstacles to progress: the problem of confirmation bias, or the tendency to filter information in a way that reinforces existing beliefs, and the problem of territorialism, whereby regulators seek to extend their jurisdiction at the expense of others.
Public engagement in the process is also important. More than 40 million Americans (according to the White House executive order, likely referring to a recent NYDig survey), are believed to have owned cryptocurrency, and their voices are expected to influence the official government position.
Likewise, as one of us wrote, there is no substitute for practical experience when developing public policy. Policy makers need to find ways to break out of the Washington bubble, develop first-hand knowledge of the space, and meet the people who actively build and use crypto products and services.
One striking difference between the prescription and the accompanying fact sheet is the focus on a CBDC. The first topic of the ordinance is the issuance of a CBDC, a topic that is already being considered by various government agencies. The report entrusted to the Treasury Department on the “Future of Currency” focuses on CBDCs, including specific questions to address. Additionally, the Attorney General must rule on the legality of a CBDC and draft a potential bill.
In contrast, the fact sheet lists CBDCs last, and its discussion under the “Future of Money” focuses only on financial inclusion, without mentioning legal analysis or proposed legislation regarding digital currencies of central banks. Additional CBDC reports in the executive order include a report from the Office of Science and Technology Policy on CBDC infrastructure and a report from the Federal Reserve on monetary policy and payment systems.
The majority of the reports required by the ordinance relate to enforcement. Probably the broadest of these is the Treasury report with policy recommendations “to protect U.S. consumers, investors, and businesses, and support expanding access to safe and affordable financial services.” . Most impactful could be a joint report by the U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) on how their existing jurisdictions can manage the risks of digital assets and whether additional authority is necessary. Other reports deal with illicit activities, 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 the Consumer Financial Protection Bureau. While both agencies have commented on crypto in the past, they are now tasked with taking a closer look at privacy, consumer protection and competition issues.
It’s too early to speculate what the CFPB might recommend in its report, but it’s worth noting that the consumer protection agency lacks historical expertise on ‘competition’. However, the agency’s current director comes from the FTC and can use the bureau’s “abuse” authority in an antitrust context. Notably, phrases like “disparate impact” and “unfair and deceptive practices” appear in the order.
It is reasonable to anticipate tensions between the CFPB and the SEC, as the jurisdiction of the two agencies is mutually exclusive in many respects.
Competition returns in the Commerce Department’s expected report, a question that innovators and industry leaders alike might welcome. The fact sheet describes this report as “Strengthening American leadership in the global financial system,” or in other words, making the country competitive in the digital asset sector.
Clearly, the Biden administration is concerned that international jurisdictions will adopt a more favorable regulatory framework for digital assets than the United States. The order emphasizes that all countries follow the cryptocurrency dictates of the Financial Action Task Force (FATF) and the Financial Stability Board. The White House is right to be concerned on this front, as adoption of the FATF’s proposed “travel rule” has been demonstrably slow.
Many jurisdictions would like to seize the future of financial services in the United States, and it is not certain that the administration has the means to prevent this arbitration.
Note that the Commerce Department will be the author of the competition report, as global finance would traditionally be the domain of the Treasury Department. The Treasury loosely attempts to direct financial regulators through the Financial Stability Oversight Board. Commerce, on the other hand, cannot claim authority over financial regulators. It is therefore unlikely that this report will resolve the main regulatory uncertainties surrounding the realm of the SEC or the CFTC.
Of course, there are other notable omissions. First, there is no mention of the Internal Revenue Service (IRS). This is surprising, especially given the ambiguous tax reporting provisions included in the administration’s flagship legislative achievement (the bipartisan Infrastructure Act).
Second, there is no mention of state regulators or regulations – although this is often overlooked by federal officials.
Third, the report of the President’s Task Force on Stablecoins does not appear, raising questions about its status.
See also: The Urgent Need for Stablecoin Regulatory Clarity | Opinion
Finally, there was a missed opportunity to reference the Executive Order on “Advancing Competition in the American Economy,” given the potential of digital assets to reduce current financial services market concentration.
An anonymous source close to the decree described the long-awaited document as the start of a race. If so, innovators must be in the running to win it. Most reports should be released 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 fall hearings and a new session of Congress in 2023. It’s time to lace up your running shoes and get ready.
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