The White House Released its Framework for Crypto: Here’s What it Says

On March 9, President Biden issued an executive order (EO) on Ensuring Responsible Development of Digital Assets — the first whole government approach to addressing the potential and risks of digital assets. The executive order called for framework and policy recommendations around key priorities outlined in the EO. Nine reports have been issued to the president, reflecting the opinions and research of experts across government. On Friday, the White House released its “First-Ever Comprehensive Framework for the Development of Digital Assets.”

The framework offers insight and policy recommendations into six categories, outlined by the EO:

• Consumer and investor protection
• Promoting financial stability
• Countering illicit finance
• U.S. leadership in the global financial system
• Financial inclusion
• Responsible innovation

Findings

Protecting Consumers, Investors, and Businesses

According to FBI statistics, digital asset scams were nearly 600 percent higher in 2021 than in 2020. Another study found that almost a quarter of ICO’s had disclosure or transparency problems. The Administration outlined the following steps to combat non-compliance:

The Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) are empowered to “aggressively pursue investigations and enforcement actions against unlawful practices in the digital assets space.” The Consumer Financial Protection Bureau (CFPB) and Federal Trade Commission (FTC) are also empowered to double down on their “efforts to monitor consumer complaints and enforce against unfair, deceptive, or abusive practices.” Agencies are encouraged to continue studying emergent risks and collaborate to address rising problems in the digital asset space.

The Financial Literacy Education Commission (FLEC) will increase its public awareness campaign to help consumers understand the risks associated with digital assets.

Financial Inclusion

The White House conceded that the traditional banking system leaves too many behind: roughly 7 million Americans have no bank account, 24 million rely on costly nonbank services, such as check cashing, and many more who use banks struggle with its cost and slow speed.

The Federal Reserve has planned the launch of the FedNow in 2023 — an instantaneous, 24/7 interbank clearing system. Coupled with the Clearinghouse’s Real Time Payment System, the Administration hopes this will advance nationwide infrastructure for instant payments. They are also prioritizing efforts to expedite cross-border payments as well.

In addition to supporting instant transactions, the President is considering creating a federal framework to regulate nonbank payment providers. The National Science Foundation (NSF) has also been empowered to support research focusing on making the digital asset ecosystem equitable and accessible by all.

Promoting Financial Stability

In May, Terra, a stable-coin pegged to the US dollar, crashed. The failure of Terra led to a wave of insolvencies that erased nearly $600 billion in wealth. This spillover effect has shown that the traditional finance system and digital assets are increasingly intertwined. Following this incident, the Administration made it a priority to regulate and address the stability risks of digital assets.

The framework encourages the Treasury to work with other financial institutions to protect against cyber vulnerabilities. The Treasury is also empowered to work with other agencies to “identify, track, and analyze emerging strategic risks that relate to digital asset markets.”

Advancing Responsible Innovation

As of 2022, the U.S. houses nearly half of the world’s 100 most valuable financial technology companies, most of which are involved in some form with digital assets. The U.S. hopes to maintain its role as one of the leading nations in innovation. The White House outlines the following steps to support digital asset innovation

The Office of Science and Technology Policy (OSTP) and NSF will develop a Digital Assets Research and Development Agenda to study fundamental topics in the digital space, such as cryptography, transaction programmability, cybersecurity, and privacy protections. They will also support research that developed educational content on responsible digital asset use.

The Treasury is, again, empowered to clarify the regulatory environment for U.S. firms looking to develop new financial technologies. The Department of Commerce is considering establishing a forum for agencies, industry experts, academics, and society leaders to exchange knowledge that could potentially inform federal regulation.

The Department of Energy, Environmental Protection Agency (EPA), and others, will study the environmental impacts of digital assets and develop performance standards as applicable.

Global Financial Leadership

As a global leader, not just in the financial system, the U.S. is incentivized to maintain the status-quo of being ahead-of-the-curve in its regulation and development in the digital asset space. In order to confidently provide guidance to allies abroad, the U.S. must focus on supporting the growth of the digital asset ecosystem.

The Administration is planning on leveraging its positions in international organizations to message American values related to digital asset development. In order to continue expanding its leadership, the U.S. will work with international organizations to set global standards for the regulation and development of digital assets.

The State Department and Department of Justice will work with its partner agencies in foreign countries to enforce violations of digital asset regulations and engage in bilateral information sharing. They will also work in conjunction with organizations like USAID to expand technical assistance to developing countries building out digital asset infrastructure.

Finally, the Department of Commerce will work to help digital asset firms expand into global markets for products.

Fighting Illicit Finance

The U.S. is motivated to continue applying its anti-money laundering and counterterrorism financing (AML/CFT) framework to the digital asset space. Despite strong efforts as a leader in this space, the U.S. has still failed to successfully move out bad actors from using cryptocurrency to launder illicit finances as well as other crimes. The most controversial of moves by the U.S. was their ban of Tornado Cash, a currency mixer, for its use by North Korea’s Lazarus Group to launder stolen digital assets.

The Administration plans to take the following steps to counter illicit activity:

The President is evaluating an amendment to the Bank Secrecy Act (BSA) to apply its regulatory framework explicitly to digital asset service providers. This includes raising the penalties for unlicensed money transmitting to match those for similar crimes under money-laundering laws.

The Treasury has been empowered to complete an illicit finance risk assessment on decentralized finances. Other agencies have been encouraged to continue exposing and disrupting illicit actors that abuse digital assets. The Treasury will also increase engagement with the private sector to ensure firms understand how the existing framework applies to digital assets.

A Note on U.S. Central Bank Digital Currency (CBDC)

The U.S. recognizes the potential benefits of creating a CBDC, but is reticent to create one. While it could foster economic growth, and maintain the U.S. role as a global leader, it could also result in severe unintended consequences.

The Administration has developed policy objectives for a U.S. CBDC system. The policy goals require further research, and will be the guiding objectives as research continues. The Treasury, in conjunction with the Federal Reserve, will create an inter-agency working group to consider the implications of a U.S. CBDC.

Conclusion

Much of what was outlined in the comprehensive framework seems symbolic at best. They are steps into the future of how the U.S. should approach regulating digital assets. But it fails to provide concrete guidelines on what types of regulation users and firms in the cryptocurrency space can expect to see.

While the SEC and Treasury should be empowered to create regulation, the recent grilling of Gary Gensler in the Senate, and much of his actions before that have actually increased volatility in crypto markets. So have the recent actions of the Treasury — with the ban of Tornado Cash and forthcoming lawsuit — as well as the Federal Reserve increase in interest rates.

So while empowering these organizations to set forth legislation falls within their purview, throwing ideas out into space and hoping they stick, a tactic which seems to be favored currently, is causing more harm to the crypto markets than good. Is crypto a security, or not? Starting with that question would prove the biggest step towards regulating cryptocurrency that the U.S. has taken to date.

There are multiple bills waiting in Congress to pass, such as the Lummis-Gillibrand Responsible Financial Innovation Act. This bill, if passed, would send the U.S. to the top in crypto innovation almost instantly. It provides a comprehensive framework for the regulation of Bitcoin, stable coins, and other digital assets. Given the SEC’s aggressive yet unpredictable behavior, this bill would solve almost every regulatory issue that plagues the digital asset space currently.

For now, real legislation has a better chance of implementing real change in the digital asset space than the White House does. But this framework is still a good indicator that the U.S. wants to foster and support the growth of digital assets in the future.

About Centuries Analytics

Investing in cryptocurrency doesn’t have to be risky — not anymore. We let data speak; not investors, “experts”, pundits, or tv show commentators. Centuries uses social media, financial, and macro-economic data to determine and predict cryptocurrency markets.

Find out more: https://www.centuriesanalytics.com/