US President Joe Biden walks from Marine One to the White House after a trip from Michigan, in Washington, US, September 14, 2022.
Tom Brenner | Reuters
Biden’s White House just released its first-ever framework on what crypto regulation in the US should look like — including ways financial services should evolve to make borderless transactions easier, and how to tackle fraud in the digital asset space. .
The new guidelines are pulling the muscle of existing regulators such as the Securities and Exchange Commission and the Commodity Futures Trading Commission, but no one is obligated yet. However, Washington’s long-awaited direction has caught the attention of both the crypto industry as a whole — and investors in this burgeoning asset class.
The framework follows an executive order issued in March in which President Joe Biden called on federal agencies to investigate the risks and benefits of cryptocurrencies and release official reports on their findings.
For six months, government agencies have worked to develop their own frameworks and policy recommendations to address half a dozen priorities identified in the executive order: consumer and investor protection; promoting financial stability; countering illegal financing; US leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation. Together, these recommendations form the first, “government-wide approach” to regulate the industry.
Brian Deese, director of the National Economic Council, and national security adviser Jake Sullivan said in a statement the new guidelines aim to position the country as a leader in managing the digital asset ecosystem at home and abroad.
Here are some of the key points from the White House’s new crypto framework.
Fighting illegal financing
Part of the White House’s new framework on crypto regulation focuses on eliminating illegal activity in the industry — and the proposed measures appear to have real teeth.
“The president will evaluate whether to call on Congress to amend the Bank Secrecy Act, anti-tip-off statutes, and anti-unauthorized money transfer laws to explicitly apply to digital asset service providers — including digital asset exchanges and non-digital asset exchanges. replaceable token (NFT) platforms,” according to a White House fact sheet.
The president is also investigating whether he can get Congress to increase penalties for sending money without a license, and possibly amend certain federal statutes to allow the Department of Justice to prosecute crimes involving digital assets in any jurisdiction where a victim of those crimes.
As for next steps, “Treasury will complete an illicit financial risk assessment of decentralized finance by the end of February 2023 and an assessment of non-replaceable tokens by July 2023,” the factsheet reads.
Crime is rife in the digital asset industry. More than $1 billion worth of crypto has been lost to fraud since early 2021, according to research by the Federal Trade Commission.
Last month, the SEC said it had charged 11 people for their role in creating and promoting a fraudulent cryptopyramid and Ponzi scheme that raised more than $300 million from millions of retail investors worldwide, including in the United States. Meanwhile, US officials seized $3.6 billion worth of bitcoin — their largest-ever seizure of cryptocurrencies — in February in connection with the 2016 hack of crypto exchange Bitfinex.
A new kind of digital dollar
The framework also points to the potential for “significant benefits” from a US central bank digital currency, or CBDC, which you can think of as a digital form of the US dollar.
At the moment there are different types of digital US dollars.
Commercial bank accounts across the country hold electronic U.S. dollars, which are partially backed by reserves, under a system known as fractional reserve banking. As the name implies, the bank keeps a fraction of the bank’s deposit liabilities in its reserves. Transferring this form of money from one bank to another or from one country to another works on old financial tracks.
There are also a range of USD-pegged stablecoins, including Tether and USD Coin. While critics have questioned whether tether has enough dollar reserves to back its currency, it remains the largest stablecoin in the world. USD Coin is backed by fully reserved assets, redeemable on a 1:1 basis for US dollars, and is managed by Centre, a consortium of regulated financial institutions. It’s also relatively easy to use wherever you are.
Then there’s the hypothetical digital dollar that the Federal Reserve would be to a CBDC. This would essentially just be a digital twin of the US dollar: fully regulated, under a central authority and with the full trust and support of the country’s central bank.
“A dollar in CBDC form is a liability of the central bank. The Federal Reserve has to pay you back,” said Ronit Ghose, head of fintech and digital assets at Citi Global Insights.
Federal Reserve Chair Jerome Powell previously said the main incentive for the US to launch its own central bank digital currency would be to eliminate the use of cryptocurrencies in America.
“You wouldn’t need stablecoins; you wouldn’t need cryptocurrencies, if you had a digital US currency,” Powell said. “I think that’s one of the stronger arguments in his favor.”
In the new White House framework, it points to the fact that a US CBDC could enable a payment system that is “more efficient, provides a foundation for further technological innovation, enables faster cross-border transactions and is environmentally sustainable”.
“It could promote financial inclusion and equity by enabling access for a broad range of consumers,” the report continues.
To that end, the government is urging the Fed to continue its ongoing research, experimentation and evaluation of a CBDC.
Ensuring financial stability
For years, central bankers and US lawmakers have complained about the rise of stablecoins, a specific subset of cryptocurrencies that have a value pegged to a real asset, such as a fiat currency like the US dollar or a commodity like gold.
These non-governmental digital tokens are increasingly being used in domestic and international transactions, which is scary for central banks because they have no say in how this space is regulated.
In May, the collapse of TerraUSD, one of the most popular US dollar-pegged stablecoin projects, cost investors tens of billions of dollars as they pulled out in a panic that some compared to a bank run. Widespread buy-in — and public PSAs — from respected financial institutions lent credibility to the project, further boosting the narrative that the whole thing was legit.
The implosion of this stablecoin project sparked a series of insolvencies that erased nearly $600 billion in wealth, according to the White House.
“Digital assets and the mainstream financial system are becoming increasingly intertwined, creating channels for turmoil to spill over,” the White House factsheet said.
The framework continues to pick stablecoins and warns that they can create disruptive runs if not accompanied by appropriate regulation.
To make stablecoins “more secure”, the administration says the Treasury will “work with financial institutions to strengthen their capacity to identify and mitigate cyber vulnerabilities by sharing information and promoting a wide range of datasets and analytical tools”, as well as by collaborating with other agencies to “identify, track and analyze emerging strategic risks associated with digital asset markets.”
Those efforts will also be made in coordination with international allies, including the Organization for Economic Co-operation and Development and the Financial Stability Board.