In times of crisis, cryptocurrencies found new roles in financial markets. We witness different forms in which cryptocurrencies are used to transfer value when the regular financial flows fail (or are just too laggy). It seems crypto is here to stay and governments are taking stock and developing plans. This March, US President Joe Biden was determined to find a regulatory solution for crypto by kickstarting the legislative machine of the US with the Executive Order on Ensuring Responsible Development of Digital Assets (“EO”).
The EO recognizes the explosive growth of digital assets as an opportunity to reinforce American leadership in the global financial system and technological development by regulating cryptocurrency and establishing a central bank digital currency (“CBDC”).
CBDCs are virtual records of existing fiat currencies (complete equivalents of “normal” currencies such as the euro, dollar, dinar, etc..), issued and regulated by monetary authorities of countries.
The EO was signed on March 9, 2022, and lays out a national policy for the regulation of digital assets across six key priorities: consumer and investor protection, financial stability, illicit finance, US leadership in the global financial system, and economic competitiveness, financial inclusion, and responsible innovation.
According to the White House fact sheet, the EO designates the Justice Department, Treasury, Securities and Exchange Commission, Federal Trade Commission, and the Consumer Financial Protection Commission to begin studying the legal and economic ramifications of “the future of money” and the role cryptocurrencies will play.
Specifically, the Justice Department will investigate whether a new law is required to create a new digital currency, while the Treasury, Securities and Exchange Commission, Federal Trade Commission and the Consumer Financial Protection Commission will study the impact the new currency and regulations will have on financial markets, consumers, investors, businesses, and equitable economic growth. Moreover, the agencies will study how the CBDC will impact competition, the market and technical infrastructure required to support it and the environmental impact of cryptocurrencies mining. The US administration aims to make crypto innovation more “responsible,” reducing any negative climate impacts, which is in line with President Biden’s green agenda. The EO also obliged regulators to “ensure sufficient oversight and safeguard against any systemic financial risks posed by digital assets.
However, the EO was not the first move the US made on the digital currencies front this year. In January, the US Federal Reserve published a document titled Money and Payments: The U.S. Dollar in the Age of Digital Transformation, pointing out the pros and cons of creating the digital dollar in the form of a CBDC. Some of the benefits recognized were increasing and improving domestic payment options, improving international payments, bolstering the dollar’s international role, increasing financial inclusion for lower-income households as well as extending public access to safe central bank money. However, it is also recognized that the CBDC as a means of payment could completely change the structure of financial markets and even lead to the destabilization of the financial system.
Therefore, while CBDCs could provide for an innovative update to the financial system, policymakers are facing and evaluating numerous issues surrounding financial stability and privacy that they must resolve for the CBDC system to work.
We will keep our eyes peeled for the developments in the US because the dollar 2.0 will may have a significant impact on global finances. What remains to be seen is what this impact will look like.
