Hi Crypto Insiders, This is the second of five newsletters I will publish every Saturday from March 5 to April 2 for our Inside Cryptocurrency audience, analyzing the laws and regulations around different applications of Blockchain technology. At the end of these five weeks, I will join the "Inside Cryptocurrency: Law and the Blockchain" event, where I will discuss these issues directly with you. For those unfamiliar with me, I'm a crypto enthusiast who has worked and invested in the space since 2016. I also hold a Law Degree and Master of Laws and currently work at Zargar Lawyers, where I advise tech startups and small businesses including blockchain companies. Today's newsletter was initially supposed to focus on the application of blockchain technology in the payments and banking industry but we will instead analyze the impacts of an executive order by President Biden that will likely pave the way for much-needed crypto regulations. This series is not intended to provide legal advice, its purpose is to share knowledge and information gained through the study and practice of law and participation in the sector. This is a quickly evolving industry so please ensure that you stay up to date with any changes and consult a lawyer who is familiar with your personal situation before participating in the industry in any capacity. If you have any feedback, comments, or requests, feel free to reach out on Twitter or Linkedin. |
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Background Since the inception of blockchain technology and, more specifically, cryptocurrencies, regulators have struggled to agree on how best to enforce laws and protect consumers from implied risks. Two of the most fundamental issues have been: - Does the technology warrant its own set of regulations and rules or can it be integrated into the existing regulatory framework?
- How can regulators protect consumers and enforce laws without stalling innovation or worse, allowing the largest technology companies of the future to be based in China, Russia, India, or other countries?
This new executive order aims to help provide clarity on these issues and build a unified approach for regulations throughout the US. It focuses on six specific areas:
Innovation - Financial Inclusion
- U.S. Competitiveness
- Consumer Protection
- Financial Stability
- Illicit Activity
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Protecting Consumers One of the defining narratives around cryptocurrencies has long been the number of scams and the market volatility, which have caused investors significant losses. The Biden administration has asked the Treasury Department to specifically investigate risks to consumers and systemic financial risks posed by digital assets. A few interesting notes on this topic include: - There is no mention of stablecoins in the executive order despite Treasury Secretary Yellen continuously calling for Congress to regulate or potentially ban stablecoins. Given that consumer protection recommendations are under her purview it should be expected that she will recommend the regulation of stablecoins at a later date.
- Much of the real risk in the digital assets markets comes not from the markets themselves but from how assets are stored. Technologically, this is where assets are most vulnerable to theft. Some states have already begun to investigate legislation that would require those holding assets or offering digital wallet services to register as a bank. Under this executive order, similar recommendations could be made at the federal level.
- These requirements were expected to be a fundamental part of the bill, with some even expecting a ban on cryptocurrencies until consumer protections could be guaranteed. Some have seen this as a victory for the cryptocurrency market, but it could be a negative sign in the medium to long term as it gives the Treasury Department the cover and clout to develop policies outside of the spotlight—these potential policy recommendations could be more in line with the restrictive executive order some had expected. In short, in legal documents, a lack of specificity is normally a bad sign, and the Treasury Department has a wide mandate to do as it sees necessary in the future.
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Central Bank Digital Currency One of the most interesting parts of the executive order is President Biden's directive that the government urgently research the potential of a central bank digital currency. - For clarity, the order does not explicitly call for the creation of a Digital U.S. Dollar but instead wants officials to explore the issue and make recommendations within six months.
- The Federal Reserve spent the last year researching the benefits and costs of a Digital U.S. Dollar and released a report in January outlining its analysis. Crucially, that report did not include recommendations by the Fed regarding whether to develop a Digital U.S. Dollar.
- Experts mostly agree that a central bank digital currency can provide many benefits, as seen in China, but there are also concerns regarding potential effects on the stability of financial markets and consumer and corporate privacy.
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Illicit Activity Focusing specifically on scams and illegal activity in the industry, the order requests that all federal agencies work together to limit the financial and national security risks created by cryptocurrencies. In a change from the existing approach, the order calls for cooperation with international regulators and further research into the need for more regulations in the U.S. - While illicit activity has been seen as a defining characteristic of cryptocurrencies, according to Chainalysis, just 0.34% of cryptocurrency transactions in 2020 were connected to illicit activity. In the same year, the U.N. estimated that between 2-5% of global GDP was linked to illicit activities. The permanent nature of the blockchain and the ease of tracking and tracing transactions makes it more difficult to use for illicit purposes than cash, which is largely untraceable.
- There are specific concerns around the use of cryptocurrencies to avoid sanctions against Russia. This could have been the impetus for recommending international cooperation, which could lead to stronger collaborations between U.S. and EU regulators.
- The Department of Justice recovered $3.6B worth of stolen Bitcoin in February and arrested two individuals who were allegedly trying to launder the funds, showing that regulators and law enforcement are already adapting to the changing technological environment.
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Climate Change The order included a point about the cost of energy used to support cryptocurrency networks and requested that the government study how to reduce the negative climate impacts. - This has been a major public issue and was used by China as a justification for banning mining activities in 2021. China's ban has led to an increase in mining and energy consumption in the U.S.
- The narrative around energy consumption by cryptocurrencies is largely flawed. In short, for the value created by bitcoin, it is one of the most efficient technologies in existence by any measure. If you are interested in reading more about bitcoin’s energy consumption, check out this issue of Inside Business I wrote in May 2021.
- Many newer networks have adopted proof of work alternatives to drastically decrease their energy consumption relative to bitcoin. Similarly, some projects like Ethereum have had community-led initiatives to move away from proof of work for environmental reasons.
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U.S. Competitiveness A significant part of the executive order is focused on ensuring that the U.S. maintains a technological competitive edge by having the top blockchain companies and technologies developed in the country. - President Biden has directed the Department of Commerce to establish "a framework to drive US competitiveness and leadership in, and leveraging of digital asset technologies."
- U.S. competitiveness has been a major issue. While the top Web 2.0 companies such as Google, Amazon, Facebook, and Microsoft are all U.S.-based, top cryptocurrency companies including Ethereum and Dapper Labs are located abroad, making them harder to regulate.
- How the recommendations of the Department of Commerce will mesh with the recommendations of other regulatory bodies, given more protective directions under this order will be something to keep an eye on when they are released in six months.
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Overall, many observers describe the order as a major victory for the industry. Without any outright bans or even strong restrictions, it is seen as a logical and rational way to provide clarity and remove regulatory uncertainty from a growing industry. All regulatory bodies have six months under this order to provide the President with their findings. Whether this will be similar to the government’s embracing of the internet in 1997, or a trojan horse that would open the floodgates to excessive regulation is yet to be seen. However, while the members of the blockchain community consider the vagueness of the order as a positive, many legal experts fear it could instead empower regulatory agencies, and specifically the Treasury Department, to issue recommendations that may undermine this burgeoning industry. | Do you think this order will lead to legislation that supports the growth of blockchain technology in the United States? | | | | |
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 |  | Liam Gill is a founder, lawyer and investor.
He previously founded Fumarii Technologies, which became a top 20 ranked cloud computing service (Yahoo Finance! 2019) valued at over $30M. He holds an LLB Laws (UK), MSc Management and Master of Laws and currently practices law at Zargar Lawyers + Business Strategists in Vancouver, Canada.
|   | | Editor | Eduardo Garcia is a writer and editor based in New York. He is writing an illustrated book about climate change that will be published by Ten Speed Press, an imprint of Penguin Random House. Bylines in The New York Times, The Guardian, Slate, Scientific American, and others. In one of his previous lives, Eduardo worked as a Reuters correspondent in Latin America for nearly a decade. | |
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