Thinking | 18 March 2022

President Biden signs new cryptocurrency executive order and EU progresses Markets in Crypto-Assets bill (MiCA)

By John Bassilios

Last week, United States President Joe Biden signed an executive order setting out key policy objectives for managing digital assets including cryptocurrencies. The order outlines a ‘whole-of-government’ approach to provide a coordinated response to regulation, consumer protection, security and innovation in relation to the growing digital asset market.

The order also provides for urgent research into the design and issue of the new US Central Bank Digital Currency (CBDC). While Biden does not go so far as to commit to implementing the CBDC, it signals greater integration of digital assets into the broader American financial system.

Meanwhile in the EU…

Following the release of Biden’s executive order, the European Union Economic and Monetary Affairs Committee has this week voted to progress negotiations with European governments on the Markets in Crypto-Assets bill (MiCA). MiCA, first introduced in September 2020, aims to regulate digital assets across the EU creating a common regulatory and licensing regime.

Unlike Biden, the Australian Government has expressed its intention to follow the EU in implementing a licensing regime for digital asset-based businesses. In the official response to the Senate Select Committee on Australia as a Technology and Financial Centre tabled in January, the Australian Government is seeking Treasury’s consultation on a licensing regime for digital currency exchanges.

Cryptos quadruple

Movements in the digital asset regulatory landscape come as statistics published in November 2021 show that cryptocurrencies have a market capitalisation above US$3 trillion, roughly quadrupling in value from 2020 estimates. However, despite their popularity, digital assets are widely known for their volatility and risk. Following a leak related to the release of the executive order, major cryptocurrencies experienced a sharp increase of between 5% and 20% in price, with Bitcoin increasing by 9% before quickly dropping to below its pre-leak price.

Environmental concerns

The environmental impact of digital assets has also been a common point of discussion. The Australian Government rejected a recommendation to offer tax incentives to digital asset companies that sourced their own renewable energy sources on the basis that the Government would prioritise establishing the regulatory framework and encouraging investment and innovation in the sector.

Similarly, controversial provisions in the MiCA legislation that would have effectively banned energy-intensive ‘proof-of-work’ cryptocurrencies such as Bitcoin from the EU were removed from the draft legislation approved this week.

The US appears to be taking a measured approach to environmental concerns, noting the US Government’s interest in developing a digital asset market that ‘reduces negative climate impacts and environmental pollution’, and seeking reports from Director of the Office of Science and Technology Policy, in consultation with the Secretary of the Treasury, the Secretary of Energy, the Environmental Protection Agency, the Council of Economic Advisers, the Assistant to the President and National Climate Advisor.

Industry response

Biden’s order has been welcomed among industry professionals like Jeremy Allaire, CEO of cryptocurrency payments company Circle tweeting: ‘this is a watershed moment for crypto, digital assets, and Web 3,…the U.S. seems to be taking on the reality that digital assets represent one of the most significant technologies and infrastructures for the 21st century.’

Rather than providing clear direction on how digital assets will be regulated, the Executive rOder outlines policy objectives and corresponding areas of research. In an accompanying statement, Biden emphasised that ‘the rise in digital assets creates an opportunity to reinforce American leadership in the global financial system and at the technological frontier, but also has substantial implications for consumer protection, financial stability, national security, and climate risk.’

Key features of the order

Biden’s order focuses on interagency collaboration on issues central to digital asset regulation organised around six key themes:

  1. Consumer, investor and business protection to address the lack of accountability and oversight of digital asset providers that has resulted in billions of dollars of losses. The order focuses on increased protection against losses through consumer safeguards, cybersecurity and promoting the responsible development of digital assets.
  2. Financial stability is to be targeted by the Secretary of Treasury who will coordinate with financial regulators, including the Securities and Exchange Commission, to assess risks across the entire US economy. Resulting reports will focus on risks posed by digital assets and the broader ‘future of payment systems’ including suggestions for reform where regulation has failed to keep up with the technology.
  3. Combating illicit activity through ‘an unprecedented focus of coordinated action’ from US agencies and international authorities. The order identifies Digital assets as a target for criminal activity that includes money laundering, cybercrime, narcotics and human trafficking as areas to be addressed.
  4. To promote the US as a leader in digital assets in both regulatory and technological innovation, the US Department of Commerce will be employed to drive domestic innovation. Internationally, the order stresses continued engagement with communities such as the G7 and G20. The US aims to be a leader in the development of global governance systems to maintain the integrity of financial systems and prevent pockets of criminal activity forming in unregulated jurisdictions.
  5. Financial inclusion by ensuring that access to financial services is equitable and safe for all communities.
  6. Responsible innovation of digital asset technology in the US. The order mandates a report on the short-, medium-, and long-term implications for energy use and environmental implications of digital assets, as well as studies in to the ‘responsible development, design and implementation’ of digital asset technologies.

Order signed against background of moves to regulate digital asset markets

Biden’s executive order comes in the context of increasing regulatory attention toward digital asset markets and service providers.

Earlier this year, the SEC fined crypto startup BlockFi a record US$50 million, alleging that the company’s retail lending product ran afoul of American securities law. The penalty was imposed as part of an overall settlement of US$100 million for breaches of state and federal securities laws.

Cryptocurrency exchange platform Coinbase has dropped a product similar to BlockFi’s. Users were offered the opportunity to earn interest on cryptocurrency held in their wallet after legal action was threatened by the SEC.

In February of this year, the Department of Justice seized 94,000 bitcoin valued at over US$3.6 billion, the single largest financial seizure in the department’s history. The seizure was prompted by the arrest and charging of two individuals with money laundering and conspiracy to defraud the United States.

Besides regulatory enforcement actions, the order’s call for investigation into the potential of a Central Bank Digital Currency comes off the back of state and city governments across the globe looking to utilise digital assets as a source of revenue. The City of Miami in Florida has successfully raised over US$25 million using CityCoin, an open-source cryptocurrency trading protocol.

With MiCA negotiations commencing and initial reports due to the Australian Government due in mid-2022, it remains to be seen whether the US will be able to achieve its goal of being a leader in global digital asset regulation, or whether the wide scope of Biden’s plan will see the US fall behind.

This article was written with the assistance of Samuel Gard, Law Graduate.

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John Bassilios

John has broad experience in financial services, funds management, blockchain, corporate and corporate law.

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