Deciphering Biden's Cryptocurrency Executive Order

President Biden’s executive order on cryptocurrency is finally here. Despite the anxiety that has been brewing since talks about the order first emerged in January, it is ultimately interested in eliciting responses, not in initiating action. And, fortunately for the President, the Cato Institute possesses a good deal of the information he seeks.

Consider a handful of the order's questions.

1. What type of regulations are needed to establish consumer protection and financial stability?

There’s been no shortage of discussions in the space regarding how cryptocurrency regulation might take shape. In fact, Jennifer Schulp even hosted a four‐​part event series dedicated to digging deeper into the discussion (Parts 1, 2, 3, and 4).

However, as the Biden administration delves into this issue, it is crucial that the dialogue is founded on solid ground. Senator Tommy Tuberville (R-AL) made this argument succinctly last week during a Senate hearing, when he asked witnesses about market problems in the bitcoin market that need to be rectified. This issue must be resolved prior to the implementation of any new regulatory framework.

For concrete examples of how to regulate most effectively, see:

• A Simple Proposal for Regulating Stablecoins
• A “Narrow” Path to Efficient Digital Currency
• The Trap of the Trilemma of Cryptocurrency Regulation

2. Should the Federal Reserve issue a central bank digital currency, or CBDC? And what are the merits of a CBDC?

Another big debate in the realm of digital currencies has been whether the Federal Reserve (Fed) should issue a central bank digital currency (CBDC). The answer, quite simply, is no. As the recent events in Canada made clear, a CBDC would risk creating a direct line that might be weaponized by the government to control the public.

As for what merits a CBDC might offer, one need only look at the Fed’s own discussion paper. After years of flirting with the idea of a CBDC and a year spent on writing the discussion paper, the Fed was only able to come up with four potential benefits of a CBDC. Considering each of these potential benefits are already being delivered through other endeavors, the Fed has not made a case for issuing a CBDC. As Cato scholars have argued, the United States would be better off renouncing plans to launch a CBDC.

For more on why the Fed should not issue a CBDC, see:

• The Fed Finally Announced Its CBDC Ideas
• The U.S. Should Disavow CBDCs and Set the Standard for Protecting Financial Privacy
• How Canada Made the Case for Cryptocurrency, Not CBDCs

3. What is the environmental impact of cryptocurrency use?

The environmental cost of cryptocurrencies has been another headline topic. It’s an issue that has come up at nearly every congressional hearing on cryptocurrency and it was even the sole focus of a hearing hosted by the Senate Committee on Energy and Commerce in January so it’s little surprise to see it here.

As with regulation in general, it is critical that the Biden administration approaches this issue with a firm foundation in mind. Most crucially, this requires acknowledging not only the environmental costs of cryptocurrencies, but also its societal advantages. Only when both costs and advantages are considered can a sound decision be made.

For additional information on the costs and advantages, see:

• How to Think Straight about Bitcoin’s Social Costs and Benefits
• Why Bitcoin Is Not an Environmental Catastrophe

4. What international policy must be set for cryptocurrency to establish global coordination against criminal activity?

The question of international collaboration on cryptocurrency policy could not have come at a more relevant time. Many policymakers in the United States have been using Russia’s attack on Ukraine to call for stricter rules on cryptocurrencies. Yet cryptocurrencies are not the “get out of jail free” card that politicians are making them out to be.

Indeed, cryptocurrencies are reversing the normal usage of financial data. Unlike traditional banks, where an international policy is in place to coordinate information across countries over a period of days or weeks, anyone may check the blockchains at any moment to see how bitcoin is performing. This fact was put on clear display when the Department of Justice, by using fairly simply blockchain analytics, was able to recover 63.7 bitcoins after the Colonial Pipeline hack last year.

For more on how cryptocurrency does not help criminals, see:

• Ukraine, Russia, Cryptocurrencies, and the Politicians Between Them
• Bitcoin Won’t Rescue Russian Oligarchs From Sanctions

5. How can we promote U.S. leadership in technology and economic competitiveness?

The executive order also asked how to drive U.S. competitiveness and leadership in cryptocurrencies. One way to achieve that goal would be to stop the “midnight rulemakings” that have targeted cryptocurrencies. Last‐​minute regulation, regulation by enforcement, as well as legislation like that in the Infrastructure Investment and Jobs Act, undermines the long‐​term ability of the industry to thrive in the United States. And as the events in China made evident, this is an industry that has the power to vote with its feet. Even if the rules are ultimately “harmless,” this practice sends the wrong message.

For more on the best ways to promote competitiveness, see:

• The Infrastructure Investment and Jobs Act’s Attack on Crypto
• New Legislation May Fix Cryptocurrency Provisions
• Congress Should Welcome Cryptocurrency Competition

Parting Thoughts

Now that the executive order has been out, the public can perhaps breathe a sense of relief knowing that the administration is truly seeking answers, not action. Nonetheless, it is sad that the government is disregarding all of the existing outstanding ideas for promoting innovation and competition in these industries.