Last month, US President Joe Biden took an important step towards positioning the US at the forefront of crypto innovation. A new executive order on crypto lays the groundwork for the ‘responsible development’ of digital assets. It’s a move that has been interpreted by the crypto industry as pleasingly neutral.
The White House has signalled that it wants to clearly define the risks and benefits of digital assets. This will enable the US to establish regulation that protects consumers and the economy while allowing innovation to flourish.
There are several key aspects to the executive order. Let’s take a look at them and what they mean for both crypto-native firms and traditional finance institutions interested in exploring the crypto space.
Providing regulatory clarity
A key focus of Biden’s executive order is on instructing various bodies, including the Financial Stability Oversight Council and the Department of Commerce, to identify the risks associated with digital assets and develop policy recommendations based upon them. These suggestions and frameworks will lay the groundwork for future regulation of digital assets.
Regulation is a hot topic in the crypto space. It has an impact upon everything from institutional adoption to product innovation, operational technology requirements to data governance.
Currently, digital assets are largely governed using existing laws that cover financial products in the US. But debate is still ongoing over how to classify crypto assets; are they securities, commodities, or something else? This means there are disputes between the different regulatory bodies in the US over who is actually responsible for overseeing crypto assets. Crypto firms therefore have to deal with a lot of different regulatory bodies. The lack of clarity this creates is stymieing innovation in the digital asset space.
It also creates a compliance problem, as firms struggle to ensure operational best practices that prepare them for consumer protections such as anti-money laundering (AML) and know your customer (KYC). As well as addressing immediate challenges, firms have to think strategically while building out their technology infrastructure. This ensures their processes are transparent and their data is accurate, which is vital for auditing and reporting.
Biden’s executive order moves the US closer to a well-defined regulatory landscape for digital assets. This will give firms the confidence to innovate and take the guesswork out of compliance.
A key concern for the crypto industry is that regulation could stifle innovation. Not only do firms have to consider how their products and services may be considered under existing laws, but also how new laws could develop in the future and impact their business.
The new executive order should serve to allay some of the fears around regulation. The order, while calling for a focus on privacy and security, aims to ‘support technological advances and ensure responsible development and use of digital assets by directing the U.S. Government to take concrete steps to study and support technological advances in the responsible development, design, and implementation of digital asset systems.’
The White House wants the United States to ‘maintain technological leadership in this rapidly growing space’. It can only do this if it creates a business environment that enables further adoption and innovation. This is a clear signal to the digital asset industry that the administration wants to support growth.
Central Bank Digital Currency
Over 100 countries are currently exploring or piloting central bank digital currencies (CBDCs) according to the White House. These digital versions of sovereign currency effectively centralise the management of a currency on a single ledger.
Biden’s executive order ‘encourages the Federal Reserve to continue its research, development, and assessment efforts for a U.S. CBDC, including development of a plan for broader U.S. Government action in support of their work.’
97% of all dollars are already digital; they’re just numbers on a database. But switching to a digital currency running on a distributed ledger could create a technology challenge for current banking infrastructure, as blockchain data is a very different format to fiat transactions and payments.
In theory it could remove one of the biggest technology challenges for businesses in the crypto space: bridging the gap between fiat and crypto assets. Firms would find it easier to carry out data quality checks like crypto trades versus payments reconciliation or general ledger to bank statement reconciliation because everything would be on blockchain.
Why is Biden’s stance on digital assets so important?
Biden’s new executive order represents a maturing of the debate around digital assets and is an important step in opening up the US markets to blockchain technology. The White House isn’t demonising cryptocurrency, nor is it promoting it wildly.
Biden has ordered that the relevant industry bodies set about assessing the pros and cons of digital assets. This means Congress can then start to bring practical solutions. That will allow the US to embrace the digital asset space, empowering businesses and individuals to effectively leverage these technologies.
Regulatory clarity could allow blockchain to expand into many new markets and grow exponentially. Crypto assets are currently worth around $2 trillion. In comparison, the global gold market is worth around $12 trillion, the stock market is worth $125 trillion and the derivatives market is estimated to be worth more than a quadrillion dollars. If digital assets can begin to penetrate these spaces then the growth potential is enormous.
But all that future growth potential depends on having the rules and regulations in place that allow that to happen. And Biden’s executive order has set the stage for this.
Visit our Crypto Insights hub for more on the operational and technological impact of evolution in the digital asset space.