U.S. President Joe Biden walks from Marine One to the White House after a trip from Michigan in Washington, the United States, September 14, 2022.
Tom Brenner | Reuters
The Biden White House just released its first-ever framework on what crypto regulation in the US should look like — including how the financial services industry should evolve to facilitate borderless transactions and how to tackle digital asset fraud action can be taken place.
The new guidelines tap into the power of existing regulators like the Securities and Exchange Commission and the Commodity Futures Trading Commission, but no one has mandated anything yet. However, the long-awaited directive from Washington has caught the attention of both the crypto industry at large and investors in this burgeoning asset class.
The framework follows an executive order issued in March, in which President Biden required federal agencies to study the risks and benefits of cryptocurrencies and issue 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 outlined in the executive order: consumer and investor protection; promoting financial stability; combating illegal financing; US Leadership in Global Financial System and Economic Competitiveness; financial inclusion; and responsible innovation. Together, these recommendations constitute the first “wide-government approach” to regulating the industry.
Brian Deese, director of the National Economic Council, and Jake Sullivan, national security adviser, said in a statement that the new guidelines aim 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 new White House crypto framework.
Fight against illegal financing
A section of the White House’s new crypto regulatory framework focuses on eliminating illegal activity in the industry — and the proposed measures appear to have real teeth.
“The President will consider asking Congress to amend the Bank Secrecy Act, anti-tip-off statutes and unlicensed money transfer laws to specifically apply to digital asset service providers — including digital asset exchanges and Nonfungible Token (NFT) platforms,” according to a White House fact sheet.
The President is also considering urging Congress to increase penalties for unlicensed money transfers and possibly amending certain federal laws to allow the Justice Department to prosecute crimes involving digital assets in any jurisdiction where a victim of these crimes is found becomes.
Regarding next steps, “The Treasury will complete a illicit finance risk assessment on decentralized finance by the end of February 2023 and an assessment on non-fungible tokens by July 2023,” the factsheet reads.
Crime is rampant in the digital asset sector. According to Federal Trade Commission research, more than $1 billion in crypto has been lost to fraud since the beginning of 2021.
Last month, the SEC announced that it had indicted 11 people for their role in creating and promoting a fraudulent crypto pyramid and Ponzi scheme that stole more than $300 million from millions of retail investors worldwide, including in the United States, has collected. Meanwhile, in February, US officials seized $3.6 billion worth of Bitcoin — their largest cryptocurrency seizure to date — 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” of a Federal Reserve digital currency, or CBDC, which you can think of as a digital form of the US dollar.
There are currently several different types of digital US dollars.
Electronic US dollars partially backed by reserves are held in commercial bank accounts around the country under a system known as fractional reserve banking. As the name suggests, the bank holds a fraction of the bank’s deposit liabilities in its reserves. The transfer of this form of money from one bank to another or from one country to another works on old financial lines.
There is also a glut 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 world’s largest stablecoin. USD Coin is backed by fully reserved assets, redeemable 1:1 for US Dollars, managed by 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 be just a digital twin of the US dollar: fully regulated, under one central authority, and with the full trust and support of the country’s central bank.
“A dollar in CBDC form is a central bank liability. The Federal Reserve has to pay you back,” said Ronit Ghose, head of fintech and digital assets at Citi Global Insights.
US Federal Reserve Chairman Jerome Powell previously said that the main incentive for the US to adopt its own central bank digital currency, or CBDC, would be to eliminate the crypto coin use case 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 for it.”
The new White House framework notes that a US CBDC could enable a payments system that is “more efficient, provides a foundation for further technological innovation, allows for faster cross-border transactions, and is environmentally responsible.”
“It could promote financial inclusion and equity by enabling access to a broad group of consumers,” the report continues.
To that end, the government urges the Fed to continue its ongoing research, experimentation, and evaluation of a CBDC.
maintaining financial stability
Central bankers and US lawmakers have for years lamented the rise of stablecoins, a specific subset of cryptocurrencies whose value is pegged to a real-world asset such as a fiat currency like the US dollar or a commodity like gold.
These non-government digital tokens are increasingly being used in domestic and international transactions, which is scary for central banks as they have no say in regulating this space.
In May, the collapse of TerraUSD, one of the most popular dollar-pegged stablecoin projects, cost investors tens of billions of dollars as it pulled out in a panic some have compared to a bankrun. Widespread buy-in — and public PSAs — from reputable financial institutions lent credence to the project and further pushed the narrative that it was legit.
The implosion of this stablecoin project resulted in a series of bankruptcies that wiped out nearly $600 billion in assets, according to the White House.
“Digital assets and the mainstream financial system are becoming increasingly intertwined, creating channels for turmoil that have spillover effects,” the White House factsheet said.
The framework continues to single out stablecoins, warning that they could create disruptive runs if not paired with proper regulation.
To make stablecoins “more secure,” the Treasury will “work with financial institutions to strengthen their ability to identify and mitigate cyber vulnerabilities by sharing information and promoting a wide range of datasets and analytical tools, and partnering with other authorities.” to “identify, track and analyze emerging strategic risks associated with digital asset markets”.
This effort is also being conducted jointly with international allies, including the Organization for Economic Co-operation and Development and the Financial Stability Board.