The Biden White House just unveiled the first-ever framework for cryptocurrency regulation in the United States, outlining how the financial services sector should develop to facilitate borderless transactions and how to combat fraud in the digital asset market.
Although no laws have yet been mandated, the new instructions use the power of already-existing regulators like the Securities and Exchange Commission and the Commodity Futures Trading Commission. However, investors in this emerging asset class as well as the entire crypto business have been interested in the long-awaited direction from Washington.
The framework comes after President Joe Biden called on federal agencies to investigate the advantages and disadvantages of cryptocurrencies and publish public reports on their findings in an executive order released in March.
Government agencies have been working to create their own frameworks and policy recommendations for the past six months to address the half-dozen priorities listed in the executive order, including financial inclusion, responsible innovation, countering illicit finance, promoting financial stability, and protecting consumers and investors. These suggestions make up the first “whole-of-government approach” to business regulation.
The new regulations are intended to establish the nation as a leader in the administration of the digital assets economy at home and abroad, according to national security adviser Jake Sullivan and head of the National Economic Council Brian Deese in a joint statement.
The new crypto framework from the White House has several important lessons that can be learned.
countering illicit financing
The White House’s new framework for crypto regulation includes a section on combating criminal behaviour in the sector, and the suggested restrictions seem to have some actual bite.
A White House fact sheet states that the president will consider whether to ask Congress to amend the Bank Secrecy Act, anti-tip-off laws, and laws against unlicensed money transmitting to explicitly apply to providers of digital asset services, such as digital asset transactions and nonfungible token (NFT) platforms.
The president is also considering whether to ask Congress to increase the fines for unauthorized money transmission and whether to change some federal laws to enable the Department of Justice to pursue crimes involving digital assets in any location where a survivor of those crimes is discovered.
The fact sheet states that Treasury will finish its assessment of the risk of illegal finance related to decentralized finance by the end of February 2023 and its examination of non-fungible coins by the end of July 2023.
In terms of crime, the market for digital assets is rife. The Federal Trade Commission’s investigation shows that since the beginning of 2021, more than $1 billion in cryptocurrency has been lost to fraud.
A fraudulent cryptocurrency pyramid and Ponzi scam that garnered more than $300 million via millions of small investors worldwide, primarily in the US, was the subject of 11 charges, the SEC announced last month.
Meanwhile, in February, U.S. authorities made their largest-ever seizure of cryptocurrencies when they confiscated $3.6 billion worth of bitcoin in connection with the 2016 breach of the cryptocurrency exchange Bitfinex.
A brand-new digital currency
The framework also suggests that a digital version of the dollar, known as CBDC, issued by the U.S. central bank may have “substantial benefits.”
There are numerous varieties of digital US dollars available right now.
Electronic US dollars partially backed by reserves are held in commercial bank deposits across the nation under a practise known as fractional-reserve banking.
As the name suggests, the bank maintains a portion of its deposit liabilities in reserves. This type of money is transferred using established financial channels from one bank to the next or from one nation to another.
Additionally, a number of stablecoins, like Tether and USD Coin, are pegged to the US dollar. Tether is the biggest stablecoin on the market even though some have questioned if it has adequate dollar reserves to support its currency.
USD Coin is managed by Centre, a group of licenced financial institutions, and is backed by completely reserved assets that can be redeemed for U.S. dollars 1:1. Additionally, it is often simple to use wherever you are.
The Federal Reserve’s version of a CBDC is the hypothetical digital dollar, which is another option. This would effectively be a digital version of the American dollar, fully regulated, governed by a single body, and supported wholeheartedly by the nation’s central bank.
“A dollar in CBDC form is a central bank liability. According to Ronit Ghose, who oversees fintech and digital assets at Citi Global Insights, “The Federal Reserve needs to pay you back.”
The elimination of the use case for cryptocurrency in the United States, according to Federal Reserve Chair Jerome Powell, would be the key driver for the United States to introduce its own digital currency.
If there was a digital US currency, “you wouldn’t need stablecoins; you wouldn’t need cryptocurrencies,” Powell added. That, in my opinion, is one of the more compelling arguments in its favour.
A U.S. CBDC might make it possible for a payment system that is “more efficient, offers a basis for additional technical innovation, promotes speedier cross-border transactions, and is ecologically friendly,” according to the White House’s proposed framework.
The paper continues, “By facilitating access for a broad group of customers, it could improve financial inclusion and equity.
In order to do this, the administration implores the Fed to keep up its continuous analysis, testing, and examination of a CBDC.
keeping the economy stable
Stablecoins are a particular subgroup of cryptocurrencies that have a value anchored to a physical item, either a fiat currency like the U.S. dollar or just a commodity like gold. Central bankers and U.S. lawmakers have lamented the growth of stablecoins for years.
The usage of these non-governmental digital tokens in both domestic and international transactions is rising, which is concerning for central banks because they have no control over how this market is governed.
A major U.S. dollar-pegged stablecoin project called TerraUSD collapsed in May, costing investors tens of billions of dollars as they withdrew in a panic that some have likened to a bank run.
The project gained legitimacy thanks to widespread support and public PSAs from reputable financial organisations, supporting the idea that everything was real.
According to the White House, the failure of this stablecoin project resulted in a string of bankruptcies that destroyed approximately $600 billion in wealth.
According to a fact sheet from the White House, “digital assets and the traditional financial system are increasingly interwoven, offering conduits for instability to have spillover effects.”
The framework continues by mentioning stablecoins specifically and cautioning that, in the absence of suitable regulation, they may lead to disruptive runs.
The administration claims that in order to make stablecoins “safer,” the Treasury will collaborate with other agencies to “identify, track, and analyse emerging strategic risks which relate to digital asset markets,” as well as “work with banking firms to bolster their capacity to identify or mitigate cybersecurity risks by sharing information and encouraging a wide range of data sets and analytical tools.”
Together with international allies like the Financial Stability Board and the Organization of Economic Cooperation and Development, these initiatives will also be made.