President Biden’s executive order on responsible development of digital assets validates what many have said for years that “Bitcoin (aka cryptocurrency) is the Future.” While the government's recognition that cryptocurrency is here to stay will be seen as validating to many, it will come with broad and sweeping consequences as apparent with deliverables assigned to over a dozen named agencies.
Biden’s 10 section opus does an excellent job of expressing his administration’s fear that cryptocurrencies have real potential to disintermediate the dollar - and along with it the country’s ability for economic control. Some thoughts to consider…
“The United States derives significant economic and national security benefits from the central role that the United States dollar and United States financial institutions and markets play in the global financial system. Continued United States leadership in the global financial system will sustain United States financial power and promote United States economic interests.”
The situation with the dollar is reminiscent of a kid who matured by third grade who thought themselves to be an invincible star athlete, only to find that their classmates would outshine them given the time (and nutrition). It’s only natural that administrators and benefactors of the dollar want to protect their success. This is not the first time this situation has occurred with the dollar: The Bretton Woods conference in 1944 essentially established the dollar as the basis for all international trade in order to promote liquidity for international trade among a wide variety of international currencies. You can look at the dollar’s role as similar to the one bitcoin and ethereum play in allowing coin or token holders to exchange more illiquid coins through a more frequently traded central value store.
The Bretton Woods conference provided the United States with tremendous power by increasing the desirability for the dollar to be held by other national governments, as the dollar was a key to trade. This in turn gave the US central bank greater ability to control national financial standing through the issuance and recall of debt.
Retaining tThe Dollar’s Power
To retain financial supremacy, the United StatesS has proposed several approaches, but the main investigation in the executive order appears to be around a Central Bank Digital Currency (CBDC) and the ability to implement priorities in international standards:
Power retention mechanism number one: Development and implementation of a United States Central Bank Digital Currency (CBDC). The potential development of a CBDC appears to be both an offensive and defensive move -
“The future of sovereign and privately produced money globally and implications for our financial system and democracy”,
“The extent to which foreign CBDCs could displace existing currencies and alter the payment system in ways that undermine the United States financial centrality”
The second, similar to the 1944 Bretton Woods Conference:, The United States is once again trying to position itself as a centerpin through international engagement. The order requires agencies establish an interagency international engagement framework to be developed within 120 days and the framework is meant to “reflect ongoing leadership….in technical standard setting bodies and other international fora to promote development of digital asset and CBDC technologies consistent with our values” By elevating status as a leader in standard setting the United StatesS can better position itself to benefit from crypto’s continued growth.
Illicit Finance and Associated National Security
It is likely that this issuance had already been in development, and that it was fast- tracked due to increasingly robust sanctions issued as a result of Russia’s war against Ukraine. As will beI’ll covered in the climate section, statements made in the executive order are clearly to support other actions that support regulatory agencies the ability to regulate blockchain technology more effectively.
There are no specifics on how anti-money laundering or combating the financing of terrorism (AML / CFT) will be changed, but there is a roadmap. Section 7 breaks down the actions to limit illicit finance and associated national security risks, and states that regulation, supervision, public-private engagement, oversight, and law enforcement are all potential mechanisms to mitigate risk.
Law enforcement will have a clearer plan than most as their role must be addressed within 120 days -, the same cannot be said for financial services regulators. Therefore we will likely be in the state that causes high blood pressure for the financial industry:, Clear law enforcement priority partnered with unclear financial services rules.
Financial stability priorities should be developed within 210 days. The Financial Stability Oversight Council will produce a report identifying specific financial stability risks and potential regulatory solutions, but this does not mean there will be clear guidance for financial industry participants.
Section 5, “Measures to protect consumers, investors, and businesses”. Again there’s nothing specific on what these measures are, but the thought is to “put in place protections as a part of efforts to expand access to safe and affordable financial services”. The eight parts in this section assign responsibility to most agencies to determine their policy recommendations for regulation within 180 days of the order.
Climate risk is becoming a regulatory priority for all industries (given we want to be able to inhabit the planet). Given the “same business, same risk, same rules” principle in the order Blockchain backed financial networks are probably going to be regulated by traditional independent financial regulators. If we go back to May 2021’s executive order regulatory agencies have been preparing for climate related financial risk. The Office of The Comptroller of The Currency (OCC) has begun developing climate risk management priorities and FSOC established a climate related financial risk committee.
This could spell trouble for proof of work chain verification methodologies. Some of you may be thinking, what is proof of work? Essentially proof of work is mining, it’s using computer power to solve a complex puzzle. Participants race to solve the puzzle first, and by being first they are given the right to broadcast the next piece of the blockchain and receive a cryptocurrency reward.
There are various financial and social costs from a proof of work methodology:
Energy usage - Computers engaged in this process need to be fastest to earn the reward, and the problems are very difficult. As a result significant energy usage is allocated to solving the problems. Bitcoin alone was estimated by the Cambridge Center for Analytical Finance to use .59% of global electricity consumption at 125 TWh hours annually.
Energy access - Large mining operations may seriously erode access to power in rural communities that do not have infrastructure to support quick changes in energy output requirements
E-Waste - By needing to be the fastest there is constant churn in machinery as miners upgrade to better hardware (mainly chips).
Accessibility - Other industries and everyday consumers are having more and more trouble accessing certain hardware as demand is outstripping supply
One I can see the topic of climate forcing more chains to a proof of stake methodology. Proof of stake determines node validation through ownership rather than competitive puzzle solving. As a result the chain can be supported by network members using financial commitment rather than their computing power. After agencies report on “connections between distributed ledger technology and short-, medium-, and long-term economic and energy transitions” the negative impact of high energy strategies could be policed by traditional financial regulators.
Stepping back from financial services regulators, there was a really interesting part in the climate section on actually using blockchain to introduce “the exchange of liabilities for greenhouse gas emissions, water, and other natural environmental assets”. Conceptually, this seems like a great application for smart contract technology.
Reports and requirements from this executive order take 120 - 210 days to come back to the president’s desk. As these start to roll in we’re going to see more and more clarity for the evolution of blockchain related regulation. Stay tuned.
The Biden administration tasked over a dozen agencies and regulatory bodies with at least some responsibility. Identifying which agencies are tasked with something or the lack of a named agency can give you an idea about the true intention of any released government report. Responsible parties include but are not limited to:
Department of State
Department of Treasury
Department of Defense
Office of the Attorney General
Department of Commerce
Department of Labor
Office of Science and Technology Policy
Office of Management and Budget
Environmental Protection Agency
National Intelligence Agency
Domestic Policy Council
Council of Economic Advisers
Department of Energy
Office of Information and Regulatory Affairs
National Science Foundation
US Agency for International Development