U.S. President Joe Biden walks from Marine One to the White House after traveling from Michigan, to Washington, U.S. September 14, 2022.
Tom Brenner | Reuters
The Biden White House has just released its first-ever framework on what U.S. crypto regulation should look like – including how the financial services industry should evolve to facilitate borderless transactions and how to crack down on fraud in the digital asset space.
The new guidelines flex the muscles of existing regulators such as the Securities and Exchange Commission and the Commodity Futures Trading Commission, but no one has imposed anything yet. The long-awaited leadership 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 Joe 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 worked to develop their own policy frameworks and recommendations to address half a dozen priorities listed in the executive order: consumer and investor protection; promote financial stability; fight against 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 Advisor Jake Sullivan said in a statement that the new guidelines are intended to position the country as a leader in the governance of the digital asset ecosystem in the country and to the stranger.
Here are some of the key takeaways from the White House’s new encryption framework.
Fight against illicit financing
A section of the White House’s new framework on crypto regulation focuses on stamping out illegal activity in the industry — and the proposed measures seem to have some real teeth.
“The President will consider whether to ask Congress to amend the Bank Secrecy Act, anti-whistleblower laws, and laws against unlicensed money transmission to explicitly apply to digital asset service providers. – including digital asset exchanges and non-fungible token (NFT) platforms,” according to a White House fact sheet.
The president is also considering whether to push Congress to increase penalties for transmitting money without a license, as well as potentially changing some federal laws to allow the Justice Department to prosecute crimes related to digital assets in any jurisdiction where a victim of these crimes is found.
As for next steps, “Treasury will complete an illicit finance risk assessment on decentralized finance by the end of February 2023 and an assessment on non-fungible tokens by July 2023,” reads the statement. information sheet.
Crime is rampant in the digital asset industry. Over $1 billion worth of crypto has been lost to fraud since the start of 2021, according to research by the Federal Trade Commission.
Last month, the SEC said it indicted 11 people for their role in creating and promoting a fraudulent crypto pyramid and Ponzi scheme that raised more than $300 million from millions of investors across the world. retail worldwide, including the United States. Meanwhile, in February, US authorities seized $3.6 billion worth of bitcoin – their largest cryptocurrency seizure ever – linked to the 2016 hack of crypto exchange Bitfinex.
A new type of digital dollar
The framework also highlights the potential for “meaningful profits” 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 several types of digital US dollars.
Electronic US dollars, which are partly backed by reserves, under a system known as fractional-reserve banking, are deposited in commercial bank accounts across the country. As the name suggests, the bank holds in its reserves a fraction of the deposit liabilities of the bank. The transfer of this form of money from one bank to another or from one country to another works on traditional financial rails.
There are also a series 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 reserved assets, redeemable on a 1:1 basis against US dollars and regulated by Center, a consortium of regulated financial institutions. It’s also relatively easy to use no matter where you are.
Then there is the hypothetical digital dollar which would be the Federal Reserve’s position on a CBDC. It would essentially be just a digital twin of the US dollar: fully regulated, under central authority, and with the full confidence and backing of the country’s central bank.
“A dollar in the form of CBDC is a liability of the central bank. The Federal Reserve has to pay you back,” said Ronit Ghose, who leads fintech and digital assets at Citi Global Insights.
Federal Reserve Chairman Jerome Powell previously stated that the main incentive for the United States to launch its own central bank digital currency would be to eliminate the use case for 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 his favour.”
In the new White House framework, he points to the fact that a US CBDC could enable a “more efficient payments system, provide a foundation for new technological innovations, facilitate faster cross-border transactions, and be environmentally sustainable.”
“This could promote financial inclusion and equity by enabling access to a wide range of consumers,” the report continues.
To that end, the administration urges the Fed to continue its ongoing research, experimentation, and evaluation of a CBDC.
Preserving financial stability
U.S. central bankers and lawmakers have for years bemoaned the rise of stablecoins, a specific subset of cryptocurrencies whose value is tied to a real-world asset, such as fiat currency like the U.S. dollar or a commodity like gold.
These non-governmental digital tokens are increasingly being used in domestic and international transactions, which scares central banks as they have no say in how this space is regulated.
In May, the collapse of TerraUSD, one of the most popular U.S. dollar-pegged stablecoin projects, cost investors tens of billions of dollars as they retreated in a panic that some have compared to a bank run. Widespread buy-in – and public service announcements – from respected financial institutions lent credibility to the project, further reinforcing the narrative that it was all legit.
The implosion of this stablecoin project led to a series of insolvencies that wiped out nearly $600 billion in wealth, according to the White House.
“Digital assets and the traditional financial system are increasingly intertwined, creating channels for turbulence to have ripple effects,” according to the White House fact sheet.
The framework goes on to identify stablecoins, warning that they could create disruptive journeys if not coupled with proper regulation.
To make stablecoins “more secure,” the administration says Treasury “will work with financial institutions to build their ability to identify and mitigate cyber vulnerabilities by sharing information and promoting a wide range of security sets. data and analytical tools,” as well as teaming up with other agencies to “identify, track, and analyze emerging strategic risks in digital asset markets.”
These efforts will also be undertaken in concert with international allies, including the Organization for Economic Co-operation and Development and the Financial Stability Board.