Biden Takes Step Toward Regulating Cryptocurrencies

Nelita Collins

WASHINGTON — President Biden signed an executive order on Wednesday directing the federal government to come up with a plan to regulate cryptocurrencies, recognizing their popularity and potential to destabilize traditional finance.

The order, under development for months, will coordinate efforts among financial regulators to better understand the risks and opportunities presented by digital assets, particularly in the areas of consumer protection, national security and illicit finance.

The move, according to the Biden administration, is a response to the “explosive growth” in digital assets, the increasing number of countries exploring central bank digital currencies and a desire to maintain American technological leadership. It directs financial regulators to continue with work that began in earnest last year, including studying and reporting on the creation of a digital dollar.

The results could help shape the contours of a rapidly innovating industry that has swiftly moved into the mainstream but that critics say enables illicit activity, including money laundering, and creates outsize financial risks for consumers and the financial system.

Brian Deese, the director of the National Economic Council, and Jake Sullivan, the president’s national security adviser, said in a statement that the order “will help position the U.S. to keep playing a leading role in the innovation and governance of the digital assets ecosystem at home and abroad, in a way that protects consumers, is consistent with our democratic values and advances U.S. global competitiveness.”

The directive calls on the government to assess the potential to develop a central bank digital currency — essentially a digital dollar — that would be used to modernize payment systems.

Central banks from the Bahamas to Sweden to China are experimenting with digital currency offerings, fueling concerns among lawmakers that the Federal Reserve might fall behind the competition.

In January, the Fed released a long-awaited report on central bank digital currencies, which it said was intended to generate debate. On Wednesday, after news of the executive order, the Fed’s official Twitter account noted that it had “made no decisions on whether to pursue or implement a central bank digital currency” and invited the public to continue commenting on issues raised by its report.

Some, including the Fed chair, Jerome H. Powell, have argued that a U.S. digital dollar could eliminate the need for privately issued stablecoins — digital currencies that promise to maintain their value by relying on stable financial backing like bank reserves and short-term debt. Private issuers resist that contention and have argued that they can coexist with a central digital currency, should one be developed.

Administration officials, who detailed the digital currency portion of the order for reporters on Wednesday, said the Fed’s earlier report provided a strong foundation but did not attempt to resolve some of the trickier issues surrounding a digital dollar, including its design and issuance.

Treasury Department officials will now embark on a much more extensive examination of the digital dollar concept and the problems that could arise from it.

Eswar Prasad, a professor of trade policy at Cornell University and the author of a book called “The Future of Money,” said the order would put the United States in “pole position” to set global standards and move closer to what he said was “the inevitable digitization of the world’s pre-eminent currency.”

Experts on cryptocurrencies have long called for the government to streamline what had been a scattershot regulatory approach.

“We need clear answers on how to do things,” said Louis Lehot, a cryptocurrency expert at the law firm Foley & Lardner. “We’re operating in a gray zone and in a sandbox.”

He added, “We’ve seen a complete lack of any strategic direction or thought from the federal government for years.”

The order comes at a moment of heightened national security concerns, including whether Russia will use cryptocurrency to evade punishing sanctions that the United States has imposed on President Vladimir V. Putin’s regime as a result of his invasion of Ukraine. A senior Biden administration official who detailed the contents of the executive order but was not authorized to speak about it publicly told reporters on Tuesday evening that work on it had predated the Ukraine war.

Cryptocurrency would not be a viable way for Russia to circumvent sanctions, the official said, but the geopolitical situation exacerbates longstanding concerns about the role of anonymity in cryptocurrency and the risk of illicit activity that results. The blockchain technology underlying cryptocurrencies gives anyone who can read computer code the ability to track transactions, ostensibly eliminating the need for trust between transacting parties and allowing for anonymity.

Names and personal identifying information are not always required to participate in the crypto economy: On many decentralized platforms, programs and apps, code runs the show. The industry’s offerings are attracting ever more money to projects that defy traditional business definitions, and increasingly vast amounts of digital assets are being managed by major players — including venture capitalists and developers — who operate without sharing their names.

Regulators have yet to write many rules surrounding the new technology, but Mr. Biden’s executive order could change that.

Anticipation of a regulatory crackdown, along with rules requiring tougher scrutiny of digital transactions that were tucked into Mr. Biden’s $1 trillion infrastructure bill, has prompted the cryptocurrency industry to beef up its lobbying presence in Washington.

Some groups promoting digital assets welcomed the order. “The fact that the U.S. president has something to say about crypto is meaningful,” said Kristin Smith, the executive director of the Blockchain Association, an industry trade group.

Senator Patrick J. Toomey, Republican of Pennsylvania and a cryptocurrency champion, directed unusual praise toward the White House for highlighting the potential benefits of cryptocurrencies, including stablecoins. But he warned that regulatory overreach could stymie growth in an area where innovation has been led by consumers.

“This technology empowers individuals, and they deserve to have a say in crafting thoughtful legislation,” Mr. Toomey said in a statement. “The administration should resist the urge to stretch existing laws in an effort to expand its regulatory authority.”

David Yaffe-Bellany contributed reporting.


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