US finally moves on crypto - but it’s a hug, not a punch

Chris Middleton Profile picture for user cmiddleton March 10, 2022 Audio mode
Summary:
America has made a belated move to forge a policy response to cryptocurrencies and digital assets.

bitcoin

President Biden has announced the launch of the US’ first whole-of-government strategy for digital assets, including cryptocurrencies. The rise of digital tokens creates an “opportunity to reinforce American leadership in the global financial system and at the technological frontier”, according to the White House:

The United States must maintain technological leadership in this rapidly growing space, supporting innovation while mitigating the risks for consumers, businesses, the broader financial system, and the climate. And it must play a leading role in international engagement and the global governance of digital assets consistent with democratic values and US global competitiveness.

The big-picture aim, then, is to protect consumers, ensure financial stability and national security, and address climate risks. 

The latter refers to the energy-intensive proof-of-work blockchain model underpinning Bitcoin and older cryptocurrencies. Some newer ones use the more efficient proof-of-stake, which is less popular among crypto’s ideological hardliners, not to mention money launderers. 

The daily-updated Cambridge Bitcoin Energy Consumption Index (CBECI) estimates that global Bitcoin mining now uses a median of 126.8 TWh of electricity a year – more than the whole of Ukraine (124.5 TWh) and almost as much as the world gold market (131 TWh). Enough electricity, it adds, to power the University of Cambridge for nearly 1,000 years.

Thumbs up?

Biden signed the Executive Order yesterday. The news saw a widely reported spike in the value of Bitcoin and other crypto assets, as the US move was seen as cautious, pragmatic, and welcoming to FinTech innovation, rather than signalling plans to regulate and restrict the space. Many in the crypto community have welcomed this as evidence that the new financial system has come of age and is no longer the preserve of students huddling around gaming rigs for warmth or pop singers buying cartoon apes.

Bitcoin’s price increased from a little over $38,000 to $42,540 on the day, but less than 24 hours later had fallen back again. Indeed, the five-day average sees BTC almost unchanged (down by 0.45 percent). In the real world of measuring success in ever-decreasing timescales, therefore, the news was a blip, a sign that some things are bigger than America. 

A similar spike in Bitcoin’s price, from $38,000 to $43,000, occurred between 28 February and 1 March, when Russia’s stock market plummeted and was closed in the wake of Western sanctions. At the time, this prompted Ipek Ozkardeskaya, Senior Analyst at Swiss online bank Swissquote, to comment:

Being able to transact value in Bitcoin helps Russian oligarchs go around the Western sanctions. It may also help Russian companies and even the Russian central bank to move funds as these entities can no longer access US dollars, and most of the Russian banks are no longer part of the SWIFT system.

If there is no Western policy response, he added:

Bitcoin could become the number one safe-haven asset in the war set-up.

Biden’s move is hardly a robust policy response to what some in traditional finance see as a threat to world banking stability. But arguably the time for that was early in the Trump presidency, during which roughly two-thirds of Bitcoin mining took place in China. But Trump was too busy trying to reverse the big oily truck of the US economy back into the 1970s to bother with trifling issues such as the rise of decentralised finance (DeFi) and a new financial system.

Digital dollar 

So, what is the US position today? The context is cryptocurrency hitting $3 trillion in global value last November – more than the GDP of a country such as the UK, for example – up from $14 billion five years earlier. November was when Bitcoin reached an all-time high of over $67,500. Good news for MicroStrategy and Tesla, which are reputed to own more coins than anyone, except the currency’s mysterious founder.

According to figures quoted by the White House, 16 percent of adult Americans, approximately 40 million people, have now invested in, traded, or used cryptocurrencies. 

That said, the use of Bitcoin as money – as a trusted means of exchange with a mutually agreed value – remains difficult, due to the ‘million-dollar pizza’ problem. Its rollercoaster price changes make it attractive to speculators, but not to anyone whose pizza purchase a few years ago could have bought them a Bugatti today.

The White House notes that over 100 countries are now exploring or piloting Central Bank Digital Currencies (CBDCs), stablecoin equivalents of their sovereign currencies. Biden has made investigating the potential of the digital dollar a strategic priority. And not a moment too soon. The White House states:

[We will] explore a US Central Bank Digital Currency by placing urgency on research and development of a potential United States CBDC, should issuance be deemed in the national interest. The Order directs the US Government to assess the technological infrastructure and capacity needs for a potential US CBDC in a manner that protects Americans’ interests. 

The Order also encourages the Federal Reserve to continue its research, development, and assessment efforts for a US CBDC, including development of a plan for broader US Government action in support of their work.

But the US is a long way behind the curve: a big worry for the nation with the world’s de facto currency of exchange. China has already launched experimental quantities of the digital yuan and may force other nations to use it to trade in goods, services, and outsourced manufacturing. Indeed, it’s notable that Beijing clamped down on crypto mining after the currency was launched, suggesting that it sees Bitcoin, Ethereum, et al, not as a new financial system in themselves, but as the canary in the coal mine of a system based on national tokens. 

The UK, meanwhile, launched a taskforce on the digital pound – aka the BritCoin – last year, but has acknowledged that launch may be five to 10 years away. The digital dollar may take just as long.

By not moving sooner to counter the threat from China or from a new peer-to-peer financial system, Trump’s America was the political equivalent of Microsoft under Steve Ballmer stomping around the stage and bellowing, while Apple and Google walked off with the mobile market.

But at least Biden is acting now. He has tasked the Financial Stability Oversight Council with identifying and mitigating any systemic, economy-wide financial risks posed by digital assets and with addressing regulatory gaps. 
He also wants to reinforce US leadership in the global financial system. In this sense, he has the tailwind in his favour: America is by far the leader in FinTech innovation, with 54 percent of the world’s top 250 FinTech companies and multimillion-dollar start-ups found in 43 US states, according to analyst firm CB Insights.

There is a critical need for safe, affordable, and accessible financial services and this should inform the US approach to digital asset innovation, added the White House: 

Such safe access is especially important for communities that have long had insufficient access to financial services. The Secretary of the Treasury, working with all relevant agencies, will produce a report on the future of money and payment systems, to include implications for economic growth, financial growth and inclusion, national security, and the extent to which technological innovation may influence that future.

The Administration will continue work that guards against risk and guides responsible innovation, it said.

My take


The US is right to act and right to take an open approach to innovation and popular usage. After all, the time to act in a more restrictive way has long passed. In the meantime, America has surged ahead in FinTech, but fallen a long way behind in exploring the digital dollar.

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