The Biden administration has unveiled its first regulatory framework for cryptocurrencies in the United States, outlining how the financial sector should change to facilitate international transactions and fight crime in the cryptosphere.
The White House report titled “The Future of Money and Payments – Report Pursuant to Section 4(b) of Executive Order 14067”, September 2022, emphasized the issue of transparency and the volatile nature of cryptocurrencies and said that the Federal Reserve’s research into a Central Bank Digital Currency (CBDC) can potentially achieve various goals such as safeguarding national security, promoting 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 order. The crypto market cap has fallen significantly since the order, and firms such as Voyager, Celsius, Three Arrow Capital and Terraform Labs have crashed under the weight of various adverse developments.
Protection of investors’ interests
Bitcoin’s market cap fell to around $2 trillion since peaking 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 United States this year. The 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 by misleading investors, such as under the guise of high returns. “One study found that nearly a quarter of digital coin offerings had disclosure issues — such as plagiarized documents or false promises of guaranteed returns. Outright fraud, fraud and theft in digital asset markets is on the rise,” the report said. The Federal Bureau of Investigation (FBI), report further noted that monetary losses from crypto fraud were almost 600 percent higher in 2021 than the previous year.
Alternatives to traditional financial systems
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 technology to improve people’s access to banking services.
Financial stability
The White House’s main concern appears to be stablecoins, whose value is tied to a fiat currency such as the US dollar or a commodity. It could destabilize the existing financial system if not coupled with financial regulations, the report noted.
For example, the TerraUSD stablecoin, which is pegged to the US dollar, lost around $600 million in May in a market crash, leading to the collapse of several crypto hedge funds that invested heavily in the stablecoin.
The legal framework aims to predict such risks and take action in advance. “Treasury will work with other agencies to identify, track and analyze emerging strategic risks related to digital asset markets. It will also work to identify such risks with US allies,” the report said.
Combating illegal finance
The report notes that cybercriminals take advantage of the absence of financial intermediaries and anonymity provided by the cryptosphere. “Digital assets have facilitated the rise of cybercriminal ransom, drug sales and money laundering for drug trafficking organizations, and the financing of the activities of rogue regimes, as was the case in the recent thefts from the Democratic People’s Republic of Korea (DPRK) – associated with the Lazarus Group, ” it says.
The Biden administration aims to amend the US Bank Secrecy Act (BSA), anti-tip-off statutes and anti-unlicensed money transmission laws to apply to providers of digital assets, such as crypto exchanges and non-fungible token (NFT) marketplaces.
