The crypto industry was asking for the list. But based on the appetizers, it is not certain that she will like the main course.
The White House has just published its first-ever comprehensive framework for regulating the nascent financial services industry, the hallmark of which is eliminating middlemen and controlling central entities.
The guidelines come after an executive order was published in March. The order outlined six priorities that the White House wanted federal agencies to consider:
- Consumer and investor protection
- Promote financial stability
- Combating Illicit Financing
- American leadership in the global financial system and economic competitiveness
- financial inclusion, and
- Responsible innovation.
Six months after the White House emphasized combatting fraud and volatility in order to protect consumers, the Joe Biden administration also wants to impose environmental standards on the industry.
The White House is particularly targeting the Proof of Work transaction validation process used by many blockchains, including Bitcoin. This mechanism consumes huge amounts of energy because it requires a lot of computing power.
With everything else, the administration is pushing for a digital dollar, a kind of digital twin of the dollar, at a time when China has taken a step forward on the issue.
Unsurprisingly, the crypto industry has reacted negatively. Evangelicals such as billionaire Michael Saylor have been particularly critical of this framework.
“The White House’s latest Climate and Energy Report is riddled with misinformation created and released by unscrupulous crypto purveyors in order to undermine #Bitcoin and advance their own interests,” said Saylor.
But other influential figures such as Changpeng Zhao, a billionaire executive of the Binance platform, have hailed the framework as paving the way for the long-awaited regulation.
“The US government’s comprehensive approach to regulating cryptocurrency will bring much-needed consistency and clarity against the current set of state laws and regulations that govern the field,” Zhao said.
Below is the outline of this framework, which highlights that millions of people around the world, including 16% of American adults, have already purchased digital assets at some point.
Fighting fraud and illegal activity
The US Securities and Exchange Commission and the Commodity Futures Trading Commission should “vigorously pursue investigations and enforcement actions against illegal practices in the digital asset space.”
— The White House will “evaluate whether to require Congress to amend the Bank Secrecy Act, counter-reporting legislation, and laws against the transfer of unauthorized funds to expressly apply to digital asset service providers — including digital asset exchange and immutable token platforms.”
The Biden administration does not rule out urging Congress to lift penalties for transferring unauthorized funds to match penalties for similar offenses under other money laundering laws. Nor does he rule out seeking to amend federal laws to allow the Department of Justice to prosecute digital asset crimes “in any jurisdiction where a victim of those crimes is found.”
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“As part of this effort, the Treasury Department will complete an assessment of illicit finance risks on decentralized finance by the end of February 2023 and an assessment of non-perishable tokens by July 2023.”
The White House says it came up with these tough recommendations because the cryptocurrency industry looks like a lawless jungle for consumers. The administration quotes a study showing that nearly a quarter of cryptocurrency offerings — the equivalent of initial public offerings of shares — have disclosure or transparency problems, such as stolen documents or false promises of guaranteed returns.
“Scams, fraud, and theft are on the rise in the digital asset market: According to FBI statistics, reported financial losses from digital asset fraud were nearly 600% higher in 2021 than the previous year,” the Biden administration said.
The environmental impact of Bitcoin
The White House is asking the Department of Energy, the Environmental Protection Agency and other agencies to consider further tracking of the environmental impact of digital assets, “developing performance standards as appropriate; and providing local authorities with tools, resources, and expertise to mitigate environmental harms.”
Bitcoin is not explicitly mentioned, but the blockchain, whose original token is Bitcoin, the most popular cryptocurrency, uses Proof of Work to validate transaction blocks in the ledger.
This mechanism creates a competition between computers, which solve mathematical puzzles to win the right to validate operations in exchange for bitcoins. This process also ensures the security and integrity of the platform.
“Operating crypto assets can consume significant amounts of electricity — which can emit greenhouse gases, put pressure on power grids, and harm some communities with noise and water pollution,” the White House said.
“There are opportunities to align the development of digital assets with the transition to a zero-emissions economy and to improve environmental equity.”
There are other, more environmentally friendly mechanisms, such as proof of stake, which was adopted on September 15 by ethereum, Bitcoin’s rival platform.
The White House is urging the Federal Reserve to explore the launch of a digital dollar, or central bank digital currency, that will be controlled by the Federal Reserve. This identical digital twin of the dollar will be fully regulated.
The Biden administration explained that the US digital dollar “facilitates cross-border transactions faster and is environmentally sustainable.” “It can promote financial inclusion and equity by enabling access to a wide range of consumers.”
It can also “protect against electronic and operational risks, protect the privacy of sensitive data, and reduce the risk of illegal financial transactions.”
In addition, the White House believes that the US digital dollar “can also help maintain the global financial leadership of the United States, and support the effectiveness of sanctions.”
Make stablecoins safer
Stable coins are cryptocurrencies that, as their name suggests, are designed not to be affected by the wide and often sharp fluctuations of the cryptocurrency market.
They are backed by a fiat currency such as an actual dollar, or a commodity such as gold – equivalent assets stored in a bank.
These stablecoins are increasingly used by institutional investors around the world because they are easy to move and speed up international transactions.
The problem is that everything happens without the knowledge of regulators and governments that have no say in their use.
But last May’s sudden crash of UST or TerraUSD, the stablecoin, revived calls from the authorities to regulate stablecoins.
The White House said that stablecoins “could create disruptive operations if not combined with appropriate regulation.” “The potential for instability in May 2022 was demonstrated by the collapse of the so-called stablecoin TerraUSD and the subsequent wave of bankruptcies that wiped out nearly $600 billion in wealth.”
To make stablecoins more secure, the Treasury will work with financial institutions to enhance their ability to identify and mitigate cyber vulnerabilities by sharing information and promoting a wide range of data sets and analytical tools.
The Treasury Department will also cooperate in identifying cryptocurrency-related risks with US allies, including through the Organization for Economic Co-operation and Development and the Financial Stability Board.