The regulatory future of cryptocurrency looks uncertain in Washington, but there is growing acceptance that blockchain finance is here to stay.
President Joe Biden issued an executive order last week directing multiple agencies to study how the United States can be a leader in cryptocurrencies, assess the risks and benefits of the technology, and formulate a plan for the government to issue its own digital dollar. But lawmakers have sharp disagreements about how financial technology should be regulated.
The executive order instructs agencies to coordinate policy and points to “profound implications for the protection of consumers, investors and businesses, including data privacy and security; financial stability and systemic risk; crime; national security; the ability to exercise human rights; financial inclusion and equity; and energy demand and climate change.”
Biden’s order amounts to the most significant government study of cryptocurrencies and distributed ledger technology, spanning financial, national security, and environmental agencies. The order explains: “In November 2021, non‑state issued digital assets reached a combined market capitalization of $3 trillion, up from approximately $14 billion in early November 2016.”
A recent survey from Cornerstone Advisors found that 1 out of 5 people hold some type of cryptocurrency. A quarter of those in Generation Z (21 to 26 years old) presently hold crypto investments, and 30% of millennials (27 to 41) have already invested in some form of digital currency. Digital assets will likely only grow in significance as the population ages.
But the increased popularity of cryptocurrencies has not led lawmakers to agree on how to regulate them. While free-market Republicans tend to favor a hands-off approach, there are sharp divisions among Democrats on how to police the emerging technology.
Massachusetts Sen. Elizabeth Warren, a longtime critic of the traditional banking and finance sectors, is a leader in opposing the mainstreaming of cryptocurrencies and of advocating heavy regulation. Warren points to consumer harms, the potential for illicit use, and the environmental impact of its electricity demand. Most recently, she has expressed concerns that digital currencies will enable Russian leaders and oligarchs to evade sanctions imposed in reaction to the invasion of Ukraine.
In a letter to the secretary of the Treasury Department, she was joined in her crypto concerns by her fellow Democrats, including Senate Banking Committee Chairman Sherrod Brown of Ohio, Sen. Mark Warner of Virginia, and Sen. Jack Reed of Rhode Island. In it, the senators expressed interest in the Treasury’s “progress in monitoring and enforcing sanctions compliance by the cryptocurrency industry and to express (their) concern that criminals, rogue states, and other actors may use digital assets and alternative payment platforms as a new means to hide cross-border transactions for nefarious purposes.”
But some of their fellow Democrats in Congress don’t agree.
In response to the executive order, Democratic Sen. Cory Booker of New Jersey tweeted that “many Americans, including significant numbers of Black and brown people, have participated in the purchase and exchange of digital assets,” and he voiced his support for “the fostering of innovation to keep America competitive on the global stage.”
A member of the House Committee on Financial Services, New York Rep. Ritchie Torres, argues that “the project of radically decentralizing the internet and finance strikes (him) as a profoundly progressive cause.” He cautioned against federal agencies getting out ahead of Congress on regulating technologies and highlighted their ability to help those often left out of traditional financial services.
Industry and policy experts had similarly disparate reactions to the order.
John Berlau of the Competitive Enterprise Institute, a free-market think tank, told the Washington Examiner that “because the executive order didn’t rake crypto over the coals and blame it for every problem over the sun, as had been widely feared, many in crypto community were relieved and conciliatory toward it.”
“I’m a bit more critical than some other pro-crypto folks, as I see the executive order as doubling down on the arbitrary approach of agencies such as the SEC,” said Berlau, a colleague of mine. “I also fault the order for encouraging government-backed central bank digital currencies issued by the Federal Reserve, which pose massive risks to privacy and financial stability.”
Adam Kovacevich of the left-of-center tech industry group Chamber for Progress told the Washington Examiner that the group’s polling from the fall of 2021 revealed “a huge division by age” on crypto policy. Younger Democratic voters are much more in favor of policymakers encouraging the use of cryptocurrency in the U.S. than their older counterparts. That divide could explain the skeptical position of more senior members of the Senate Banking Committee versus that of the pro-crypto younger members of the House Committee on Financial Services.
Kovacevich said the most significant impact of the executive order is its signal to lawmakers that crypto is here to stay, and the task at hand is making sensible rules for its governance. He said Democratic members and staff might not know enough to have taken firm positions about how cryptocurrencies should be regulated, but he sees a growing realization among them that they need to get up to speed.
He posed the unanswered question for many elected Democrats: “Is a politician’s first instinct to greet crypto with optimism or pessimism?”