March 13, 2022 9:00 PM
WASHINGTON — President Biden’s long-awaited executive order on cryptocurrency was met with cautious optimism from much of the finance industry, but with so many important details unresolved, it’s far from certain what the policy outcome of the order will ultimately be.
The March 9 order marks the first time the White House has formally weighed in on cryptocurrency, and although it is, in essence, a plan for the Treasury Department and other regulatory agencies to make a plan, it’s still a watershed moment.
It’s also a moment when stakeholders can exert influence to shape what the ultimate trajectory of regulation and policy will be. Digital asset advocates are hopeful that regulation will bolster trust (and encourage the U.S. government to more seriously consider its own digital currency), while banks are hoping for clear rules of the road and consumer advocates are hoping crypto can help households underserved by the existing financial system get a leg up and more fully participate in the economy.
“What this all means in practice will be the devil in the details,” said Josh Lipsky, a senior director at the Atlantic Council, who previously advised the International Monetary Fund and worked for the Obama White House. “To be regulated is to be legitimized, so it’s a question of who will be on what side of that, and what those regulations will look like.”
Crypto advocates were largely happy with the executive order. Instead of solely focusing on risks, the executive order also acknowledged what it sees as cryptocurrency’s potential, quelling some fears.
The Blockchain Association called the order “further proof that the crypto ecosystem is now a vital and inseparable part of the national economy.” Markets cheered the move, with bitcoin prices jumping about 10% on Wednesday before coming down on Thursday.
And by and large, the crypto order set off a positive reaction from the banking corners of Washington. The Bank Policy Institute lauded the “clarity” more federal action of crypto would bring, and applauded the idea of bringing crypto and fintech startups into a regulatory scheme. The trade group noted that “regulated financial institutions have been stuck on the sidelines waiting for further regulatory action before expanding their digital offerings.”
Banks were more tepid on a central bank digital currency, however. The Bank Policy Institute said it believes further research on U.S. digital currency would show that “CBDCs would pose considerable and unavoidable costs to the financial system and economy while producing few, if any, tangible benefits.”
American Bankers Association President and CEO Rob Nichols said in a statement that the group is “concerned that it clearly directs federal agencies to begin pursuing a central bank digital currency even before determining if a U.S. CBDC is actually ‘in the national interest’ as the order also requires.”
What follows is an examination of the near-term and longer-term impacts of the administration’s renewed focus on crypto.
Some regulators are ahead of the curve
Regulators have so far pursued a fragmented response to crypto regulation, with various government agencies largely following their own rules and agendas.
The Securities and Exchange Commission has been the most aggressive, with Chair Gary Gensler, a former blockchain professor at MIT Sloan School of Management, emerging as Washington’s proto expert. He’s compared crypto rules to the Wild West, and has also likened digital assets to the auto industry, which he’s said only became profitable amid robust regulation.
Todd Phillips, director of financial regulatory and corporate governance at the Center for American Progress, an influential left-leaning think tank, said the executive order showed that the Biden administration “recognizes that regulators have existing authority to get their arms around crypto assets.”
“The way that I think about crypto, is that these assets are just like other traditional financial assets, and crypto securities are just like traditional securities,” Phillips said. “I think it’s important that the administration recognizes this and treats those assets similarly.”
The SEC’s approach to digital assets so far has been through the agency’s oversight role. The agency has tussled with Ripple Labs, charging the company and its two executives with violating investor-protection laws.
The agency also assessed BlockFi Lending a $100 million penalty on claims that the cryptocurrency company violated investor-protection laws in the first enforcement action targeting a crypto lending platform.
“Today’s settlement makes clear that crypto markets must comply with time-tested securities laws,” Gensler said at the time.
While Gensler’s pushed for the burgeoning cryptocurrency industry to fit into the current oversight framework, he’s also called on Congress and the federal government to consider a more holistic approach.
“I am technology-neutral,” he said in prepared testimony for the Senate Banking Committee in September. “I think that this technology has been and can continue to be a catalyst for change, but technologies don’t last long if they stay outside of the regulatory framework.”
Commodity Futures Trading Commission Chairman Rostin Behnam has also tried to stake his claim on the cryptocurrency oversight and regulatory space. In a February testimony before the U.S. Senate Committee on Agriculture, Nutrition, and Forestry, Behnam asked for an additional $100 million to his agency’s $300 million annual budget to take on additional work related to regulating the digital assets market.
Similar to the SEC, the CFTC most often uses its enforcement powers to address digital assets. And like Gensler, Behnam has advocated for broader oversight and rulemaking of digital assets.
Banking regulators have been slower to address digital assets. The Office of the Comptroller of the Currency issued an interpretive letter instructing banks wanting to provide cryptocurrency services to check in with their local OCC supervisory office. The OCC, the FDIC and the Federal Reserve have also promised banks more guidance when it comes to cryptocurrency in the year ahead.
Acting OCC head Michael Hsu, when asked about the cryptocurrency executive order at the American Bankers Association Washington Summit, signaled a cautious approach to cryptocurrency regulation, citing his experience at the SEC during the financial crisis.
“Let’s not do that. Let’s do this in the right way,” he said. “So I think that’s kind of the approach that we’re taking.”
All roads lead to FSOC
In the executive order, the White House focused on having agencies assess cryptocurrency as a potential systemic risk. In Dodd-Frank language, that gives the federal government a lot of leeway to make big changes.
The most likely path to doing so is the Financial Stability Oversight Council. The executive order tasks the Treasury Secretary Janet Yellen with convening FSOC within 210 days. FSOC would then produce a report that outlines financial stability risks and regulatory gaps posed by cryptocurrency and make “any proposals for additional or adjusted regulation and supervision as well as for new legislation.”
After FSOC completes its report, the body has broad powers to make deep changes in the crypto industry.
One of the group’s most powerful tools is its ability to designate systemically important financial institutions. In 2019, FSOC made it difficult to include any nonbanks in the list of systemically important institutions, guidance that Phillips said this current crop of regulators could overturn.
“I would really love to see FSOC work on rewriting that designation guidance yesterday,” he said.
If FSOC’s report finds that any cryptocurrency institutions are systemically important, Phillips said it’s possible they could be added to that list.
But even if the council doesn’t designate any crypto firms as systemically important, FSOC still has a lot of power to shift the regulatory tone, Lipsky of the Atlantic Council said. FSOC has the ability to get regulators on the same page, making coordination between the banking regulatory agencies easier, and harmonizing the approach overall.
FSOC has addressed digital assets before: In its 2021 annual report, the body named digital assets, stablecoins and decentralized finance as a potential risk to the financial system.
“Because speculation appears to drive the majority of digital asset activity at this time, the price of digital assets may be highly volatile,” the report said. “Digital assets may also be subject to the risk of operational failures, fraud and market manipulation.”
Stablecoins, despite being marketed as holding a stable value, “may be subject to widespread redemptions and asset liquidations if investors doubt the credibility of that claim,” according to the report.
The emphasis on systemic risk in the executive order, as well as the mentions of how many people hold some kind of digital asset and how important of an underpinning these digital assets have become to the economy, signal that FSOC will take a leading role in the federal government’s cryptocurrency response, Lipsky said.
“All of that makes you feel that this is something they want the overarching umbrella of financial regulators to prioritize,” he said. “That’s why you’d do an executive order in the first place.”
A green light for the Fed
Federal Reserve Chair Jerome Powell has repeatedly said the central bank would not move forward on the creation of a digital dollar without a clear mandate from Congress and/or the White House. Now it has one.
In his executive order on Wednesday, President Biden deemed the development of a U.S. central bank digital currency a matter of “national interest” and directed the Fed to draw up a governmentwide plan of attack for implementation.
“The president has no authority to order the Fed to do anything, but what he can do and what he has done is tell the central bank that the White House believes that a CDBC may well be vital,” Karen Petrou, managing partner of data firm Federal Financial Analytics, said. “This is a request the Fed cannot ignore.”
The White House’s preference for the creation of a CBDC has set off alarm bells within the banking industry. Issuing its own digital currency directly could enable the central bank to disintermediate banks from key parts of the financial system.
“We urge the administration and the agencies involved to carefully consider the implications of a U.S. CBDC, which could fundamentally reshape our banking and payments system to the detriment of bank customers and their communities,” Rob Nichols, president and chief executive of the American Bankers Association, said in a statement.
In past speeches and writings, Powell and the Fed have expressed a reluctance to deal directly with consumers, indicating that U.S. CBDC holdings and payments would be conducted through private sector wallets.
CBDCs have been on the Fed’s radar since at least 2017, but it has taken a decidedly measured approach toward the concept. It did not become a major focus for the central bank’s board of governors until 2020, Petrou said. Even then it was of the opinion that it was “more important to get [a CDBC] right than to be first,” as Powell said during an October 2020 panel discussion hosted by the International Monetary Fund.
In the Fed’s first discussion paper, published in January, it noted the potential benefits and consequences of issuing a digital dollar, but resolved not to make any decisions about it unilaterally.
Industry observers say the institution’s approach to creating a CBDC mirrors the path it took for real-time payments. While such networks have been offered by central banks in the U.K., China, India and elsewhere for years, the Fed’s FedNow Service will not debut until next year, with full implementation being realized in 2024.
Petrou said that she believes Biden’s executive order will force the Fed to “speed up its slow-mo actions,” but that she is not convinced a U.S. CDBC is an inevitability. Opinions differ on the need for a Federal Reserve-backed digital currency and questions must be answered about privacy protection and equal access, she said.
“We will need to know who is on the board of governors when this decision is made to have a sense of how it is going to be made. There’s a strong difference of opinion on the board right now about the need for CBDC,” she said. “And again, the White House cannot order one. It can just push really hard to force the Fed to make up its mind. That’s what I think we’ve seen.”
A level playing field for banks
One of the biggest benefits for the banking industry to come from a governmentwide evaluation of digital assets is the regulatory clarity that process would yield.
Commercial banks are no strangers to digital currencies, having long used the technology within their own credit card offerings. Some institutions have made forays into offering custodial accounts and exchange services for cryptocurrencies as well, but without a regulatory framework, most have been hesitant to keep pace with the rapid advancements in the space.
“Over the last several years, Big Tech and FinTech startups have enjoyed the benefit of little to no regulatory oversight while offering an ever-expanding range of digital and crypto products and services, some of which present significant risks to unsuspecting consumers,” Bank Policy Institute President and CEO Greg Baer said in a statement. “Meanwhile, regulated financial institutions have been stuck on the sidelines waiting for further regulatory action before expanding their digital offerings.”
Jesse Van Tol, head of the consumer advocacy group National Community Reinvestment Coalition, said digital innovations are creating more accessible and affordable financial services for historically underserved communities. Yet, because banks have been reluctant to adopt such technologies without regulatory clearance, many of those groups are being funneled toward companies with little oversight.
“We know that millions of Americans are experimenting with digital assets, with disproportionately higher rates of usage among low-wealth households and those of color,” Van Tol said in a statement. “It is important for regulators to get ahead before too many vulnerable households are harmed by markets that are largely outside of the regulatory perimeter.”
Some say the executive order is too little too late. Thomas Vartanian, head of the advocacy group Financial Technology & Cybersecurity Center, said the sector is more than three times larger than the White House’s $3 trillion estimate and more entrenched in the broader economy.
“While no fault of the Biden Administration, the admonitions in the order are 14 years too late in trying to bring rationality, security, and stability to an unregulated industry that is actually more than $10 trillion in size when derivative cryptocurrency instruments and leverage are included,” Vartanian said in a statement. In his view, optimal security cannot be achieved for digital assets without a fundamental reimagining of the internet.
Still, some kind of regulatory road map has to be established for banks to make meaningful advancements into the rapidly evolving world of digital assets. Petrou said Wednesday’s executive order was that moment.
“Innovation does not wait for regulation,” she said. “Regulated industries are being left further and further behind in this vacuum and the president’s order will hope to resolve that.”
A future-proof dollar
The term “reserve currency” is not mentioned in this week’s executive order, but protecting the U.S. dollar’s “unique” and “central” role in the global economy is a clearly stated priority.
Biden notes the U.S.’s position as a cradle for innovation and its leadership role among the Group of 7 and other multilateral government initiatives in developing standards for digital assets. He also calls for the country to redouble its efforts to make cross-border transactions faster and cheaper, something industry observers say the U.S. government has fallen behind on in recent years.
Aaron Klein, a senior fellow in economic studies at the Brookings Institution, said the U.S. has been a “laggard” in the payments system for more than a decade, pointing to the UK’s adoption of a real-time payment system more than a decade ago and China’s rollout of a digital yuan.
While he sees the executive order as a step in the right direction, Klein is not hopeful that the U.S. will be able to make up ground on its peers anytime soon.
“America is playing catch-up with its payments system,” Klein said. “The White House is right to be more engaged on this but I’m skeptical that America will go from a laggard to a leader on payment systems, particularly if the Fed is in charge.”
The U.S.’s leading role in sanctioning Russia for its invasion of Ukraine has added fuel to the fire for protecting its prominent role in the global economy. It also changed the context through which Biden’s executive order will be viewed, Klein said.
“It highlights the growing role of our payment system as a tool of foreign policy,” he said. “Had this order come out earlier, it would have been seen more as being a tool of domestic policy.”
Given the size of China’s economy and its aspirations to surpass the U.S. as the originator of the world’s reserve currency, the digital yuan has been viewed as a threat to the dollar, Petrou said. However, the Chinese government’s hands-on approach to its digital currency is a point of concern in the global financial market, she added.
For now, the dollar’s standing as the world’s reserve currency is safe, Petrou said, but it is not guaranteed to stay that way.
“Current events remind everyone of the vital importance of political stability and geopolitical strength and I think strongly reinforce the value of the dollar, but that won’t last,” she said. “The digital transformation is inevitable.”
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