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What does President Biden’s Executive Order mean for the future regulation of crypto?
In terms of regulation, crypto experienced mixed fortunes in 2021. China, the world’s second-largest economy, banned transactions outright, while El Salvador became the first country to adopt bitcoin as legal tender, much to the dismay of the International Monetary Fund.
The US has been relatively slow to regulate crypto, but its dominance of the global financial system means any measures it implements have repercussions elsewhere. That’s why Wednesday 9th March was such a momentous day for the industry – US President Joe Biden signed an executive order (EO) designed to ensure the responsible development of digital assets.
So what does this EO mean for the future of crypto regulation? Let’s start by looking at the goals it sets out to address.
A road map for crypto regulation
The EO essentially explains how the White House would like to regulate crypto. It establishes high-level goals intended to promote the benefits of digital assets while reducing the negative aspects:
- Develop policy recommendations to protect consumers, investors and businesses
- Identify and mitigate the potential risks to US and global financial stability
- Prevent the use of crypto for illicit financial activity (particularly timely following Russia’s invasion of Ukraine)
- Develop a framework to foster US leadership in digital asset technologies and maintain the country’s status within the global financial system
- Leverage crypto to improve access to financial services for unbanked and underbanked Americans
- Support the implementation of digital asset systems which promote security and combat illicit activity
- Further explore the viability of a central bank digital currency
According to Aaron Klein, a senior fellow at think tank the Brookings Institute, the EO is a call to action, as opposed to a specific game plan. It directs the various agencies responsible for supervising the US financial system to publish reports showing how they’ll achieve these goals. For instance, the Department of the Treasury will lead on developing policy recommendations with input from the Federal Trade Commission and Department of Labour among others.
Balancing regulation and innovation
At first glance, regulation appears to contradict the principles underpinning bitcoin, the original cryptocurrency. After all, bitcoin was designed to be censorship-resistant. The blockchain technology providing the infrastructure to process transactions is a decentralised database stored across a network of computers, removing the need for a centralised authority.
Fast forward 14 years, and crypto is experiencing mainstream adoption. Many of today’s industry leaders welcome regulation because it conveys a sense of legitimacy and represents a stamp of approval from the authorities, which reassures the public.
The industry response to President Biden’s EO was generally positive. The Blockchain Association, which has 80 members, welcomed the approach and positioned itself as ready to collaborate with the various regulatory agencies. Washington DC-based think tank Coin Centre believed the EO demonstrated that the US government recognised crypto’s role in the economy and would boost adoption.
Balancing regulation and innovation is key though. The crypto industry has the potential to address aspects of the existing financial system that fail to meet the needs of the 60 million US citizens who the Federal Reserve classifies as unbanked or underbanked. Poorly designed regulation could stifle this potential.
In an effort to strike the right balance, the World Economic Forum published guidelines for regulators and policymakers in August 2021, which are worth taking into account as they build on the measures called for by the EO:
The state of crypto crime
The headline figure from the 2022 Crypto Crime Report, published by leading blockchain analytics firm Chainalysis, appeared to support arguments in favour of regulation. According to the report, crypto-based crime hit a record high in 2021, with $14 billion transferred to illicit wallets, up from nearly $8 billion in 2020.
Stolen funds were by far the main driver of the rise in illicit activity. One of the biggest incidents occurred in August 2021 when a hacker stole over $600 million in crypto from the Poly Network, a DeFi platform which facilitates communication between different blockchains. However, this particular crime ended with an unexpected twist. In response to a public letter from Poly Network, the hacker returned the funds, possibly because they realised that laundering that amount of money would be practically impossible, as the authorities could trace it on the blockchain.
While $14 billion is an unacceptable sum to be lost to crime, it needs to be considered in context. Total crypto transaction volume increased to $15.8 trillion in 2021, 567% higher than the previous year. That meant illicit activity as a share of overall transactions fell to just 0.15%, the lowest level on record.
What does the future hold?
Based on its current momentum, it seems like a matter of ‘when’ rather than ‘if’ crypto achieves widespread adoption.
According to the 2021 Global Crypto Adoption Index, published by Chainalysis, crypto use grew by 881% in the year ending June 2021. Among the applications driving this growth in emerging markets were remittances, commercial transactions, and efforts to protect savings from currency devaluation. Demand from institutional investors surged in developed countries.
Some of the world’s biggest companies have also helped crypto gain traction. A filing lodged with the US Securities and Exchange Commission in early February showed that car manufacturer Tesla held $2 billion of bitcoin on its balance sheet at the end of 2021. It briefly accepted bitcoin as payment last year before stopping in May due to concerns about the environmental impact of processing transactions (known as ‘mining’ in crypto terminology).
President Biden’s EO will help crypto maintain momentum. Despite trepidation before it was issued, the US government came out in support of crypto, acknowledging its role in the US financial system, providing clarity so the industry can attract further investment and keep growing, and reassuring consumers that regulators are protecting their interests.
To learn more about how CUBE tracks and analyses regulations for crypto on a global scale, arrange a demo today.