The US could play a leading role in helping to drive cryptocurrency adoption and innovation domestically and globally.
The regulatory clarity that seems likely to emerge from President Biden’s recent executive order on cryptocurrencies could further boost adoption and stimulate innovation in the US by reassuring risk-averse consumers and providing entrepreneurs with a thoroughgoing framework for the responsible development of products and services.
The president’s long-awaited approach to digital assets, which essentially looks to study and address their risks and harness their benefits, comes amid rapidly growing public interest in and embrace of decentralised finance. Surveys suggest that about 16 percent of American adults have invested in, traded, or used cryptocurrencies, says a White House briefing paper. The global market cap for the sector, it notes, surpassed $3 trillion last November. While some see any form of overarching governance of virtual coins as undermining their anonymous, borderless unique selling proposition, there is little doubt that it is necessary to promote continued sectoral growth and credibility.
The executive order calls on government agencies and regulators to provide thorough assessments of the wide-ranging implications of cryptocurrency growth and the level and kind of oversight that will be required for the protection of stakeholders, maintenance of economic stability and national security as well as responsible innovation promoting financial inclusion. Significantly, there is also a call for consideration of a digital form of the US dollar, as scores of other countries explore or pilot central bank digital currencies (CBDC). This suggests that the administration does not want to be left behind and sees a CBDC as enabling the US to remain financially competitive globally.
There had been concerns that the president would usher in a regulatory crackdown in response to critics of virtual assets who warn that they are too easily exploited by speculators and criminals and potentially pose a threat to monetary policy. The Biden approach looks to interrogate and respond to these risks but at the same recognises the importance and potential of the crypto market together with the need for the US to take leading role in its development to reinforce its pre-eminence in the global financial system. On the face of it, the Biden approach seems to be about fostering a dynamic, enterprising US cryptocurrency ecosystem while mitigating the possible risks associated with such a strategy.
Interestingly, the executive order does not set out specifically the kind of regulation it envisages but the indications are that it won’t be ‘light touch’, given the enumerated risks it will be expected to tackle. Developing an all-embracing regulatory framework will be challenging and the administration is right to take some time to properly research what will be required. Too weak and the credibility of the cryptocurrency sector could be called into question. Too strong and entrepreneurs and investors will shift their operations and interests to jurisdictions with more liberal regulatory regimes. Clearly, the administration will have to strike a balance with regulation which, if carefully thought through, should promote digital asset adoption and innovation in the US.
As President Biden’s directive states, significant numbers of Americans are being drawn to cryptocurrencies, with those who struggle to access mainstream financial services, the so-called underbanked, possibly benefiting as public engagement with the asset class grows. But if the government wants to widen financial inclusion through cryptocurrencies, it must reassure those thinking of dipping their toes into the market – especially the more risk-averse among them – that it is properly overseen. That will require the introduction of measures that deter speculative investment and financial crime, both of which having contributed to a perception of the cryptocurrency ecosystem as akin to the ‘Wild West’.
Yet at the same time, the authorities must not lose sight of the dynamic, revolutionary nature of digital coins. Protections for consumers and investors are one thing, but if restrictions limit experimentation and blue-sky thinking then the innovation that drives the sector will fall away. Entrepreneurs and investors must be allowed to take calculated risks. Practically, that might mean, for instance, offering them regulatory sandboxes to test products and services or monitoring performance closely post launch to ensure concerns identified in development have been addressed. Fundamentally, industry players need parameters and rules within which to operate, not barriers to entry or intrusive oversight. And for the president to achieve his objectives, it is the former rather the latter that seem likely to emerge.
Some have characterised the executive order as vague, a postponement of important decisions about the future of virtual assets at a time when they have rarely been under greater scrutiny. But better to delay until officials have a comprehensive understanding of the sector and the implications of possible courses of regulatory action, given that so much is at stake. The US could play a leading role in helping to drive cryptocurrency adoption and innovation domestically and globally. The signs are that it wants to. But its regulatory approach must be well considered, and Biden’s executive order suggests that it will be.