President Joe Biden has ordered federal regulators to study the risks and potential benefits of digital assets and their underlying technology while encouraging the Federal Reserve to continue evaluating the creation of a federally backed digital currency.
In an executive order and accompanying fact sheet released Wednesday, Biden said the nearly $2 trillion digital asset market is no longer a curiosity but an emerging financial technology that 40 million American adults—16 percent of the population—have used to trade, invest, or pay for goods and services.
“The United States has an interest in responsible financial innovation; expanding access to safe and affordable financial services; and reducing the cost of domestic and cross-border funds transfers and payments, including through the continued modernization of public payment systems,” said Biden in the executive order. “We must take strong steps to reduce the risks that digital assets could pose to consumers, investors, and business protections; financial stability and financial system integrity; combating and preventing crime and illicit finance; national security; the ability to exercise human rights; financial inclusion and equity; and climate change and pollution.”
Digital assets include cryptocurrencies, which are created by users, contained in a digital blockchain that records every transaction in a publicly accessible ledger, and are not issued or controlled by any government entity. They have existed outside of U.S. regulatory control since their creation in 2009. The technology was created to both eliminate the need for a middleman in financial transactions (financial institutions) and establish a financial instrument accessible and functional worldwide that is unlinked to fiat currencies like the dollar, euro, or yen.
Cryptocurrency has ballooned in value in a relatively short time, from $14 billion five years ago to $3 trillion in November 2021. Its current estimated value has since fallen to just under $2 trillion, according to cryptocurrency market tracker CoinMarketCap.
In recent years, the cryptocurrency industry has sought clarity from U.S. regulators, particularly the Securities and Exchange Commission (SEC), on how they view cryptocurrency within their scope of authority. Until now, the SEC has largely viewed cryptocurrency through a lens of the risks it poses to investors rather for the benefits it might provide to the overall financial system.
In January, the Federal Reserve issued a report examining the state of play for a U.S. central bank digital currency (CBDC). The report did not reach any conclusions about whether the U.S. government should get into the business of creating and backing a cryptocurrency.
Biden’s order ratchets up the urgency in the research of a U.S. CBDC’s benefits and risks.
“President Biden’s historic executive order calls for a coordinated and comprehensive approach to digital asset policy,” said Treasury Secretary Janet Yellen in a statement. “This approach will support responsible innovation that could result in substantial benefits for the nation, consumers, and businesses. It will also address risks related to illicit finance, protecting consumers and investors, and preventing threats to the financial system and broader economy.”
Yellen said the Treasury Department will partner with other federal agencies to “produce a report on the future of money and payment systems,” convene the Financial Stability Oversight Council to evaluate risks posed by digital assets and the implementation of potential safeguards, and work with international partners to promote standards to create a level playing field worldwide.
Republicans, who have mostly been supportive of the cryptocurrency industry while leery of regulation that might hinder it, were cautiously optimistic about Biden’s order.
Sen. Pat Toomey (R-Penn.), ranking Republican on the Senate Banking Committee, said Wednesday in a press release he was pleased Biden has recognized the “tremendous potential benefits” of cryptocurrency. While he supported enacting a regulatory framework for digital assets, Toomey cautioned, “The administration should resist the urge to stretch existing laws in an effort to expand its regulatory authority.”
Biden’s order contained six separate goals that seek to assess the risks and rewards offered by digital asset technologies.
The first goal is to protect U.S. consumers, investors, and businesses with “sufficient oversight” by regulators.
“In the absence of sufficient oversight and standards, firms providing digital asset services may provide inadequate protections for sensitive financial data, custodial and other arrangements relating to customer assets and funds, or disclosures of risks associated with investment,” the executive order said, noting investors have suffered “billions of dollars in losses” due to cybersecurity and market failures at major digital asset exchanges and trading platforms.
The second goal is to protect the U.S. financial system and global financial stability and mitigate risk. The executive order said digital asset issuers, exchanges, trading platforms, and other intermediaries should be subject to the same regulatory and supervisory standards that govern traditional market infrastructures and financial firms, “in line with the general principle of ’same business, same risks, same rules.’”
Third, the misuse of digital assets poses significant illicit finance and national security risks. “The United States must ensure appropriate controls and accountability for current and future digital assets systems to promote high standards for transparency, privacy, and security—including through regulatory, governance, and technological measures—that counter illicit activities and preserve or enhance the efficacy of our national security tools,” the order said.
Fourth, the United States must show leadership by remaining in the “forefront of responsible development and design of digital assets and the technology” by setting standards that promote “democratic values; the rule of law; privacy; the protection of consumers, investors, and businesses; and interoperability with digital platforms, legacy architecture, and international payment systems,” Biden said.
Fifth, the United States must promote access to safe and affordable financial services to be enjoyed equitably by all Americans, most notably those underserved by the current banking system.
The final goal is promoting fairness in digital asset technology. “The technological architecture of different digital assets has substantial implications for privacy, national security, the operational security and resilience of financial systems, climate change, the ability to exercise human rights, and other national goals,” and the United States has a responsibility to ensure digital asset technologies are developed in a responsible manner, the order said.