Biden legitimizes cryptocurrency with regulatory exploration
For a time, cryptocurrency was seen as a fringe currency – a libertarian way of investing that challenged the traditional framework of brokers, dealing desks and advisers. Cryptocurrency was unique: for better or for worse, it put investments (and market fluctuations) in the hands of the public.
Latest figures from the White House now estimate that around 16% of US citizens invest in cryptocurrencies. The days of cryptocurrency on the fringe are over, it now (albeit tentatively) exists in the mainstream of financial services. Despite this, it remains on the fringes of regulatory parameters and governmental understanding. Or he did, until this week.
On March 9, President Biden signed an executive order that will mark a turning point for cryptocurrency – not just for regulation, but how it is viewed around the world. The college is the first of its kind to explore a “whole of government” approach to understanding and addressing the risks and benefits of digital assets and the technology in which they are founded.
The executive order, unlike other government messages so far, acknowledges but does not dwell on the inherent risk of cryptocurrency. Instead, he calls on government agencies and regulators to “boost US competitiveness and leadership” in digital assets, while identifying risks and closing “any regulatory gaps.” In a week in which the SEC and CFTC have issued high-value charges against fraudulent cryptocurrency stocks, it’s both welcome and refreshing to see.
Cryptocurrencies and digital assets offer tremendous value to financial markets. Not only are they laying the foundation for innovation and technology that reinvigorates the traditional “financial services” mix, but they are opening up the financial space for more affordable and accessible financing. This is something the Executive Order recognizes and encourages further exploration.
So far, cryptocurrency has been approached with caution. In the UK, for example, the Financial Conduct Authority has warned that “crypto-asset investors should be prepared to lose all their money”. Such statements acknowledge the risk but do not take steps to address it. Biden’s executive order is the first step in a government-wide treatment of cryptocurrency risk, and the starting block from which cryptocurrency could become safer, more accessible, and more accepted.
Legitimizing Cryptocurrency with Regulation
Biden’s executive order serves several purposes, but its overriding message is that cryptocurrency must no longer sit on the fringes — it must be brought into the mainstream and tempered accordingly. While there may be some cryptocurrency purists who will shun this and any subsequent regulation for cryptocurrency in the protection of its original libertarian roots, most of the cryptocurrency community will be without any no doubt delighted to see it legitimized and deemed worthy of regulatory scrutiny.
The order does not establish new regulations, but rather encourages the reduction of “regulatory loopholes” and “encourages regulators to provide sufficient oversight” of the risks posed by digital assets. There is no doubt that with this new exploration, we will see new regulations or at the very least the expansion of existing regulatory parameters for cryptocurrency.
While this means more up-front work for compliance and regulatory change teams, in the long run it will create a huge advantage in the United States. The current regulatory framework around cryptocurrency is fragmented at the state and federal levels. Around the world, financial regulators have scrambled to regulate, or at least register, companies that offer cryptocurrencies. However, there remains a lack of clarity and a lack of global regulatory standards. So compliance teams are currently battling through hundreds of fragmented regulatory obligations to create something that will stand up to regulatory scrutiny.
The signing of this Executive Order has the potential to add new vigor to regulatory discussions and will undoubtedly see an alignment of regulatory understanding, which will simplify compliance issues in the longer term.
Cooperation for strong regulations and standards
The time, resources and administration required to manage the lack of regulatory standards is a big part of the work of the compliance team. First, the team must scour the regulatory internet and track changes where they occur. Then they need to align those regulatory obligations and expectations across borders and jurisdictions, understanding what prevails, who applies where and to whom. Finally, these regulations will need to be mapped to internal policies, procedures and controls. In short, the compliance team must tear apart different regulations and stitch them together into a patchwork of broadly identical but slightly different regulations. The fewer the standards and the less collaboration, the greater the complexity.
That this executive order calls for “coordinated action among all relevant U.S. government agencies” will be music to the ears of many. Not only could this order mark the start of new regulatory initiatives, but these initiatives could also be developed collaboratively, which means an increased chance for standardization – and less complexity for compliance.
This is especially true given the order’s demand for collaboration “with our allies and partners to ensure international frameworks, capabilities, and partnerships are aligned and responsive to risk.” It is likely that we will see new regulations being crafted with regulators, tech leaders, and crypto founders involved in the regulatory process from the start. This will be a huge leap forward for regulatory developments and, without getting carried away, could trigger the start of a comprehensive approach to regulation.
Welcoming openness and curiosity for technology
Although Biden’s executive order does not outline a clear plan for the future of cryptocurrency and digital assets, it does go a long way in legitimizing digital currencies. No doubt we will see a ripple effect across the world in the months to come. What is particularly important is the declaration of a government that, instead of being fearful, is explorer and curious about new technologies and innovation. Technology, especially in financial services, is a natural evolution. Although there will be resistance to change, the need and even the benefits of today’s digital world will prevail. The fact that Biden has recognized the potential of the technology can only be a good thing for the end consumer and therefore we expect to see regulatory efficiency improve.