Tom Brenner | Reuters
The Biden White House has released its first framework on what crypto regulation should look like in the US – including how the financial services industry should evolve to make borderless transactions easier, and how to crack down on fraud in digital assets. space.
The new directives tap the muscles of existing regulators such as the Securities and Exchange Commission and the Commodity Futures Trading Commission, but so far nothing mandates any. However, Washington’s long-awaited direction has caught the attention of 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 investigate the risks and benefits of cryptocurrencies and release an official report on their findings.
For six months, government agencies have been working to develop their own frameworks and policy recommendations to address the half-dozen priorities listed in the executive order: consumer and investor protection; promote financial stability; combating illegal finance; US leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation. Together, these recommendations include a first, “whole-government approach” to regulating the industry.
National Economic Council Director Brian Deez and National Security Advisor Jake Sullivan said in a statement that the new guidelines are meant 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 findings from the White House’s new crypto framework.
fighting illegal finances
A section of the White House’s new framework on crypto regulation focuses on ending illegal activity in the industry – and the proposed measures have real teeth.
“The President will evaluate whether to call on Congress to amend the Bank Secrecy Act, anti-tip-off statutes, and laws against the transfer of funds without a license to explicitly apply to digital asset service providers – Including digital asset exchanges and non-fungible token (NFT) platforms,” according to the White House fact sheet.
The president is also looking at whether to push Congress to increase the penalties for unlicensed money transfers, as well as potentially amend some federal laws to allow the Justice Department on digital asset crimes in any jurisdiction. To be allowed to prosecute where the victim of those crimes is found.
In terms of next steps, “the Treasury will complete an illegal financial risk assessment on decentralized finance by the end of February 2023 and an assessment on non-fungible tokens by July 2023,” reads the fact sheet.
Crime is at its peak in the digital asset sector. According to research by the Federal Trade Commission, the cryptocurrency has lost more than $1 billion since the beginning of 2021.
Last month, the SEC said it charged 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 retail investors around the world, including the United States. Meanwhile, in February, US authorities confiscated $3.6 billion worth of bitcoin – their largest seizure of cryptocurrency to date – related to the 2016 hack of crypto exchange Bitfinex.
A New Kind of Digital Dollar
The framework also points to the potential for “significant gains” from a US central bank digital currency, or CBDC, which you can think of as a digital form of the US dollar.
Right now, there are many different types of digital US dollars.
There are electronic US dollars sitting in commercial bank accounts across the country, partially backed by reserves, under a system known as fractional-reserve banking. As the name implies, the bank keeps a fraction of the deposit liabilities of the bank in its reserves. Transfer of this form of money from one bank to another or from one country to another operates on legacy financial tracks.
There are also a slew 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 fully backed by reserve assets, redeemable for US dollars on a 1:1 basis, and governed by the Central, a consortium of regulated financial institutions. It’s also relatively easy to use wherever you are.
Then there is the hypothetical digital dollar that would be the Federal Reserve’s move on CBDCs. It will essentially 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.
Ronit Ghosh, head of fintech and digital assets for Citi Global Insights, explained, “One dollar in the form of a CBDC is a liability of the central bank. The Federal Reserve has to pay you back.”
Federal Reserve Chairman Jerome Powell It was previously stated that the main impetus for the US to launch its own central bank digital currency, or CBDC, would be to eliminate the use case for crypto coins in the US.
“You wouldn’t need stablecoins; if you had a digital US currency you wouldn’t need cryptocurrencies,” Powell said. “I think that’s one of the strong arguments in favor of it.”
In the new White House framework, it points to the fact that US CBDCs could enable a payment system that is “more efficient, provides a foundation for further technological innovation, and facilitates faster cross-border transactions.” and is environmentally sustainable.”
“It can promote financial inclusion and equity by enabling access for a broader set of consumers,” the report continues.
To this end, the Administration urges the Fed to continue its ongoing research, experimentation and evaluation of CBDCs.
financial stability protection
Central bankers and US lawmakers have for years lamented the rise of stablecoins, a specific subset of cryptocurrencies whose value is tied to real-world assets, such as fiat currency like the US dollar or commodities like gold.
These non-government digital tokens are increasingly being used in domestic and international transactions, which is scary for central banks because they don’t have much of a say in how this space is regulated.
In May, the collapse of TeraUSD, one of the most popular US dollar-linked stablecoin projects, cost investors billions of dollars as they exited in a panic that some compared to running a bank. Extensive buy-in from reputable financial institutions – and public PSAs – gave credibility to the project, furthering the narrative that the whole thing was legit.
According to the White House, the collapse of this stablecoin project led to a series of bankruptcies that wiped out nearly $600 billion in assets.
According to the White House fact sheet, “Digital assets and the mainstream financial system are increasingly intertwined, creating channels for turmoil.”
The framework continues to single out stablecoins, warning that they could lead to disruptive runs if not coupled with proper regulation.
To make stablecoins “secure,” the administration says the Treasury will work with “financial institutions to promote information sharing and a wide range of data sets and analytical tools, as well as collaboration with other agencies for cyber security.” “To identify, track and analyze emerging strategic risks related to digital asset markets” to enhance their ability to identify and mitigate vulnerabilities.
Those efforts will also take place in collaboration with international partners, including the Organization for Economic Co-operation and Development and the Financial Stability Board.