Tom Brenner | Reuters The Biden White House just released its first framework for what cryptocurrency regulation should look like in the US — including how the financial services industry should evolve to facilitate borderless transactions and how to fight back fraud in the digital asset space. The new guidelines leverage the power of existing regulators like the Securities and Exchange Commission and the Commodity Futures Trading Commission, but no one has enforced anything yet. The long-awaited direction from Washington, however, has caught the attention of both the crypto industry as a whole — and investors in this nascent asset class. The framework follows an executive order issued in March in which President Biden called on federal agencies to examine the risks and benefits of cryptocurrencies and issue official reports on their findings. For six months, government agencies have been working to develop their own frameworks and policy recommendations to address a half-dozen priorities listed in the executive order: protecting consumers and investors; promoting financial stability; combating illicit financing; US leadership in the global financial system and economic competitiveness. financial inclusion; and responsible innovation. Together, these recommendations constitute the first, “whole-of-government approach” to regulating the industry. Brian Deese, Director of the National Economic Council and National Security Adviser Jake Sullivan said the new guidelines are intended to position the country as a leader in the governance of the digital asset ecosystem at home and abroad. Here are some of the key takeaways from the White House’s new encryption framework.
Combating illegal financing
One part of the White House’s new framework for cryptocurrency regulation focuses on stamping out illegal activity in the industry — and the proposed measures appear to have real teeth. “The President will assess whether to ask Congress to amend the Bank Secrecy Act, anti-trafficking laws to expressly apply to digital asset service providers — including digital asset exchanges and off-the-shelf platforms tokens (NFTs),” according to a White House newsletter. The president is also considering whether to push Congress to increase penalties for unauthorized money transmission, as well as potentially amending some federal statutes to allow the Justice Department to prosecute digital asset crimes in any jurisdiction where a victim of those crimes is located. As for next steps, “Treasury will complete an illegitimate financial risk assessment for decentralized finance by the end of February 2023 and an assessment for non-tradable tokens by July 2023,” the prospectus said. Crime is rampant in the field of digital assets. More than $1 billion in crypto has been lost to fraud since the beginning of 2021, according to a Federal Trade Commission investigation. Last month, the SEC said it was charging 11 people for their roles in creating and promoting a fraudulent crypto pyramid and Ponzi scheme that raised more than $300 million from millions of private investors worldwide, including in the United States. Meanwhile, in February, US officials seized $3.6 billion worth of bitcoins — their largest cryptocurrency seizure ever — related to 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. Currently, there are many different types of digital US dollars. Electronic US dollars are held in commercial bank accounts across the country, partially backed by reserves, under a system known as fractional-reserve banking. As the name suggests, the bank keeps in its reserves a fraction of the bank’s deposit liabilities. The transfer of this form of money from one bank to another or from one country to another works with traditional financial railways. There are also a number of USD-pegged stablecoins, including Tether and USD Coin. Although critics have questioned whether tether has enough dollar reserves to support its currency, it remains the largest stablecoin on the planet. USD Coin is backed by fully pledged assets, redeemable on a 1:1 basis for US dollars and governed by the Centre, a consortium of regulated financial institutions. It’s also relatively easy to use no matter where you are. Then there’s the hypothetical digital dollar that would be the Federal Reserve’s take on a CBDC. This would essentially just be a digital twin of the US dollar: Fully regulated, under a central authority and with the full faith and backing of the country’s central bank. “A dollar in CBDC form is a central bank liability. The Federal Reserve has to pay you back,” explained Ronit Ghose, head of fintech and digital assets at Citi Global Insights. Federal Reserve Chairman Jerome Powell previously stated that the main motivation for the US to launch its own central bank digital currency, or CBDC, would be to eliminate the use case of cryptocurrencies in America. “You wouldn’t need stablecoins, you wouldn’t need cryptocurrencies, if you had a US digital currency,” Powell said. “I think that’s one of the strongest arguments in its favor.” In the White House’s new framework, it points to the fact that a US CBDC could enable a payments system that is “more efficient, provides a basis for further technological innovation, facilitates faster cross-border transactions and is environmentally sustainable.” “It could promote financial inclusion and equity by enabling access to a broad set of consumers,” the report continues. To that end, the administration urges the Fed to continue its ongoing research, experimentation, and evaluation of a CBDC.
Ensuring financial stability
Central bankers and US lawmakers have for years lamented the rise of stablecoins, a particular subset of cryptocurrencies that have value tied 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 to regulate this space. In May, the collapse of TerraUSD, one of the most popular stablecoin projects pegged to the US dollar, cost investors tens of billions of dollars as they pulled out in a panic that some have compared to a bank. Widespread buy-in — and public PSAs — from reputable financial institutions lent credibility to the project, further driving the narrative that the whole thing was legit. The collapse of that stablecoin project led to a series of bankruptcies that wiped out nearly $600 billion in wealth, according to the White House. “Digital assets and the underlying financial system are becoming increasingly intertwined, creating channels of disruption that will have knock-on effects,” according to the White House bulletin. The framework goes on to single out stablecoins, warning that they could create disruptive paths if not coupled with proper regulation. To make stablecoins “more secure,” the administration says the Treasury Department will “work with financial institutions to strengthen their ability to identify and mitigate cyber vulnerabilities by sharing information and promoting a broad range of datasets and analytical tools, as well as collaborate with other organizations to identify, monitor and analyze emerging strategic risks related to digital asset markets. These efforts will also be done in consultation with international allies, including the Organization for Economic Co-operation and Development and the Financial Stability Board.
