The Biden administration has unveiled its first regulatory framework for cryptocurrencies in the US, outlining how the financial sector should change to facilitate international transactions and combat crimes in the crypto sphere.
The White House report titled “The Future of Money and Payments—Report Pursuant to Section 4(b) of Executive Order 14067”, September 2022, underlined the issue of transparency and the volatile nature of cryptocurrencies and said the Federal Reserve’s research on a Central Bank Digital Currency (CBDC ) could potentially achieve various goals such as safeguarding national security, advancing financial inclusion, and promoting economic growth.
The legal framework compiles the results of nine reports provided to the White House in response to a March executive order. The crypto market value dropped significantly since the order, and firms like Voyager, Celsius, Three Arrow Capital, and Terraform Labs have crashed under the weight of various adverse developments.
Safeguarding Investors’ Interest
Bitcoin's market capitalisation fell to around $2 trillion since its peak in November 2021. However, some companies saw robust growth. For example, crypto lending firm BlockFi was valued at $3 billion after a funding round in March. It topped the Inc. 5000 list of fastest-growing crypto firms in the US this year. White House's crypto rules, which focus on preventing criminal activities, could help the industry.
The report, released this month, said the crypto firms are raising huge sums of money by misleading investors, such as under the pretext of high returns. "One study found that almost a quarter of digital coin offerings had disclosure problems—like plagiarized documents or false promises of guaranteed returns. Outright fraud, scams, and theft in digital asset markets are on the rise,” the report said. Citing data from the Federal Bureau of Investigation (FBI), the report further noted that monetary losses from crypto scams were nearly 600 per cent higher in 2021 than in the previous year.
Alternatives To Traditional Financial System
Many people are left out of the conventional financial system as they cannot afford to open a bank account due to the minimum balance requirement. The White House said it aims to create an ecosystem that supports the development of payment providers, using new technologies to enhance people’s access to banking services.
White House’s main concern seems to be stablecoins, whose value is pegged to a fiat currency like the US dollar or a commodity. It could destablise the existing financial system if not paired with financial regulations, the report noted.
For instance, the TerraUSD stablecoin, which is pegged to US Dollar, lost around $600 million in May in a market crash, leading to the collapse of several crypto hedge funds which invested heavily in the stablecoin.
The legal framework aims to predict such risks and take action in advance. "The Treasury will work with other agencies to identify, track, and analyze emerging strategic risks that relate to digital asset markets. It will also collaborate on identifying such risks with US allies," said the report.
Tackling Illicit Finance
The report notes that cybercriminals takes advantage of the absence of financial intermediaries and anonymity provided by the crypto sphere. "Digital assets have facilitated the rise of ransomware cybercriminals; narcotics sales and money laundering for drug-trafficking organizations; and the funding of activities of rogue regimes, as was the case in the recent thefts by the Democratic People’s Republic of Korea (DPRK)- affiliated Lazarus Group," it said.
The Biden administration aims to amend the US Bank Secrecy Act (BSA), anti-tip-off statutes, and laws against unlicensed money transmission to apply to digital asset providers, such as crypto exchanges and non-fungible token (NFT) marketplaces.