The Breakdown - A Watershed Moment: Everything You Need to Know About Biden’s Crypto Executive Order

Starting point is 00:00:00 This is clearly the line that they want to thread. They want to take advantage and have America take advantage of this emerging technology space, but they want to do so in a way that is responsible, that considers the risks, that considers the challenges, and has actual answers for them. It's unbelievably clear reading it that that's the line they're trying to thread, and responsible innovation is not only the sixth out of the six key priorities. It's the one that I think overarchingly frames what they're trying to do. Welcome back to The Breakdown with me, NLW.

Starting point is 00:00:34 It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.io, Arculus, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, March 9th, and today we are finally discussing the long-awaited Biden executive order. Now, this has been discussed for months now. It was anticipated at the end of last year. People have used it as a cudgel to fud the space. So the question, of course, is what is actually in this big document from the Biden administration? Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, rate it, review it, or go to the Discord. You can find a link in the show notes or go to bit.com slash breakdown pod. Also, a disclosure as always, in addition to them being a sponsor of the show, I also work with FTX. So, as I mentioned, by way of background, this executive order has been hanging over the heads of the industry for a very long time. In many ways, the predominant narrative was that this was going to represent some significant crackdown. People couldn't imagine a scenario in which the Biden administration would have an executive order around crypto

Starting point is 00:01:52 that didn't say that they were taken out the trash and focused on crime and all that sort of stuff. Now, based on the evidence that I had always seen, I have never really subscribed to that being the most likely scenario. Every little drip and drop that we heard about this seemed like it was more about the administration taking the industry seriously, wanting to study it more and wanting to have a coherent perspective on the whole, rather than this piecemeal agency-by-agency thing, which was clearly not up to the 10. of regulating this industry as it got bigger and more significant in the world. But there's no doubt that the fear of this executive order has put a damper on the industry from a price and enthusiasm perspective, and that has only been exacerbated recently by the war in Ukraine. The connection there

Starting point is 00:02:39 is that many thought that the narrative of sanctions that has been so predominant for the last week or more was somehow going to induce Biden's team to put more negative language or more restrictive rules in this executive order. Now, to be fair to the folks who had that perspective, you have folks out here like Elizabeth Warren and crew drafting legislation around crypto sanctions, focusing on a problem that the people who deal with sanctions don't seem to think we have. Earlier in the week, the acting director of FinCEN said, put it really simply and clearly, quote, although we have not seen widespread evasion of our sanctions using methods such as cryptocurrency,

Starting point is 00:03:16 Prompt reporting of suspicious activity contributes to our national security and our efforts to support Ukraine and its people. Basically, the folks who care about sanctions are saying that so far crypto has not been a major issue. But yet, that hasn't changed the desire of some politicians to use it as a cudgel to keep pushing an anti-crypto line. All of this gets us up to last night when Treasury Secretary Janet Yellen had commentary that leaked. A statement from the Treasury office was posted to the web and then taken down shortly, but captured for all on social media to see. Given that, we knew this morning it was looking likely that we were finally going to get this executive order and that it was certainly not going to be the worst version of what people were

Starting point is 00:03:59 anticipating. So let's talk about this executive order, and let's start with the fact sheet. So the executive order is a much longer document. The fact sheet is the summary that people tend to build their commentary and newsmaking around. One juicy nugget just to, just a little bit of to kick the thing off right from the beginning is how many Americans the Biden administration believes have interacted with digital assets and crypto in some way. They put that number at 16% of Americans, 40 million Americans in total. Now, just to give you the most high-level TLDR before we get into the specifics, this is a classic political document of there's opportunity and challenge. The opportunity is around the ability to extend America's technological

Starting point is 00:04:41 leadership and innovation, the challenge is to protect people to make sure it doesn't undermine other American objectives like anti-money laundering and fighting terrorist financing and so on and so forth. If you dislike crypto, you're going to point to the parts where they say that it can be used for bad stuff, and if you like crypto, they're going to talk about American leadership. And that's just the way it is, and nothing about this change is that dynamic at all. To quote from the fact sheet, 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.

Starting point is 00:05:19 The United States must maintain technological leadership in this rapidly growing space, supporting innovation while mitigating the risks for consumers, businesses in the broader financial system, and the climate. And it must play a leading role in international engagement and global governance of digital assets consistent with democratic values and U.S. global competitiveness. That is why the fact sheet goes on, President Biden will sign an executive order outlining the first ever whole-of-government approach to addressing the risks and harnessing the potential benefits of digital assets and their underlying technology. The order lays out a national policy for digital assets across six key priorities. So basically here we have, again, an even split in these six priorities around the challenges and around the opportunities. The first three they lay out are consumer and investor protection. This is, of course,

Starting point is 00:06:07 the Ballywick of the SEC and the CFTC and all those folks, who are making sure that we're not over-marketing crypto and we're not targeting audiences that don't understand what's going on and so on and so forth. Next, financial stability. This is a conversation about whether volatility in the crypto industry could spill over into other parts of the markets. Could it become something that has implications beyond just this industry? This has come up a lot more in the context of highly opaque hedge funds getting into the crypto game. And what many regulators are worried about or at least want to have a better understanding of is how the volatility in crypto markets could get translated into traditional markets

Starting point is 00:06:47 vis-a-vis those market actors such as those hedge funds who play in both of those spaces. Next on the key priority is illicit finance, and this is the third of the three that kick it off that focus on the negative side or the challenge side. And of course, this has to do with the use for crypto to be used to evade sanctions, as we've been discussing all week. The use for crypto to be used as a criminal enterprise, for it to support ransomware, for it to do whatever set of illicit things that people have pointed to it for. So to be clear, this is nothing new, this is nothing unpredictable. These are three of the six priorities, but the other three are a little bit more positively inclined.

Starting point is 00:07:25 U.S. leadership in the global financial system and economic competitiveness. Now, one dimension of that that we'll get into in just a second is also around stable coins in the U.S. dollar. But first, another of the six priorities, financial inclusion, and the way that crypto could potentially be a way to get people who are unbanked or underbanked access to better financial services. And finally, a big, nice catch-all for positive things, responsible innovation. And this is the term that I think you're going to end up hearing people in the policy world associate this executive order with going forward. This is the crypto-as-responsible innovation executive order from the Biden administration.

Starting point is 00:08:04 This is clearly the line that they want to thread. They want to take advantage and have America take advantage of this emerging technology space, but they want to do so in a way that is responsible, that considers the risks, that considers the challenges, and has actual answers for them. It's unbelievably clear reading it that that's the line they're trying to thread, and responsible innovation is not only the sixth out of the six key priorities. It's the one that I think overarchingly frames what they're trying to do. Nexto is the go-to platform for all things crypto.

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Starting point is 00:10:28 responsible innovation and why it's important and how it relates to citizens having access to better financial services. So I'm going to excerpt a couple pieces of this just so you get a sense of how they're writing about it in the actual executive order. We must reinforce you United States leadership in the global financial system and in technological and economic competitiveness, including through the responsible development of payments innovations and digital assets. The United States has an interest in ensuring that it remains at the forefront of responsible development and design of digital assets and the technology that underpins new forms of payments and capital flows in the international financial system, particularly in setting standards

Starting point is 00:11:06 that promote democratic values, the rule of law, privacy, the protection of consumers, investors, businesses and interoperability with digital platforms, legacy architecture, and international payment systems. Jumping down to another section, we see, we must promote access to safe and affordable financial services. Many Americans are underbanked, and the cost of cross-border money transfers and payments are high. The United States has a strong interest in promoting responsible innovation that expands equitable access to financial services, particularly for those Americans underserved by the traditional banking system, including by making investment, including by making investments in domestic and cross-border funds transfers and payments cheaper, faster, and

Starting point is 00:11:46 safer, and by promoting greater and more cost-efficient access to financial products and services. The United States also has an interest in ensuring that the benefits of financial innovation are enjoyed equitably by all Americans and that any disparate impacts of financial innovation are mitigated. Now, I'm choosing to read you those sections rather than the sections on anti-money laundering and illicit purposes, just because what I want to point out is that this is the language that the worst critics didn't necessarily expect to see in here. When you read the language of those opportunity side of the equation around digital assets, it's clear at least from this that this executive order is trying to position those things as sincere desires rather than just

Starting point is 00:12:26 paying lip service to them. Another type of language that I want to point out has to do with CBDCs. And spoiler alert, I think this report is a big coming out party for a U.S. CBDC policy. for policy and actions related to United States central bank digital currencies. The policy of my administration on the United States CBDC is as follows. Sovereign money is at the core of a well-functioning financial system, macroeconomic stabilization policies, and economic growth. My administration places the highest urgency on research and development efforts into the potential design and deployment of United States CBDC.

Starting point is 00:13:05 My administration sees merit in showcasing United States leadership and participation in international fora related to CBDCs and in multi-country conversation and pilot projects involving CBDCs. Any future dollar payment system should be designed in a way that is consistent with United States priorities and democratic values, including privacy protections, and that ensures the global financial system has appropriate transparency, connectivity, and platform and architecture interoperability or transferability as appropriate. This is definitely a step beyond the language that you've seen from, for example, Jay Powell and the Federal Reserve, who have refused to be committed to the idea that the United States is just by virtue of the fact that they're researching

Starting point is 00:13:48 it going to, for sure, issue a digital fiat. This executive order certainly doesn't go that far, but it certainly comes a hell of a lot closer than previous statements. Now, what is the real meat of this executive order? Well, it's all about studies, research and reports that involve multiple departments so there is some common consensus. You see this as a part of every single section within 180 days of this order, some combination of the Treasury Secretary, the Secretary of State, the Attorney General, the Secretary of Commerce, the Secretary of Homeland Security, the Director of the Office of Budget and Management, the Director of National Intelligence, other agency heads, the SEC, the CFTC, you name it, coming together to form opinions on some reports. In some cases, as it relates to cryptocurrency mining,

Starting point is 00:14:37 and its energy footprint, the reporting process has two parts, a 180-day first draft report, and then a one-year report following up on areas that are deemed to need further study or consideration. And this, I think, is one of the really big parts of this. This has been telegraphed. Every time we've gotten any leaked information about this, what those leaks have suggested is that this report's job was basically to align different parts of the administration to come together to do this sort of research and reporting. And that's what we saw here, and it's important to note what that's not.

Starting point is 00:15:11 This is not a bunch of new rules. This is a bunch of new processes that have been started by which different parts of the government may make better informed rules later on. Jake Trevinsky says anyone worried that President Biden's executive order would spell doom and gloom for crypto can fully relax now. The main concern was that the EO might force rush rulemaking or imposed new and bad restrictions. but there's nothing like that here. It's about as good as we could ask. Eric Voorhees from Shapeshift says the crypto executive order basically says,

Starting point is 00:15:43 we're going to look into this stuff, as if they haven't been for years, and then lists a number of platitudes about balancing innovation with protecting the financial system, a perfectly political communication. Jerry Brito, the executive director of Coin Center, says, okay, I read it. Here's my quick take on the executive order. Over the past couple of weeks, we've seen a variety of politicians, media, and consultants who are often former officials from two or three administrations ago, drive a narrative that crypto is not just useless but dangerous and should be restricted. On the background of this narrative fog,

Starting point is 00:16:13 you could find statements from the professionals at Treasury and the White House on the front lines of crypto issues, consistently saying that while it presents certain risks, they can be mitigated and the tech holds great promise. Well, the EO is just further affirmation that when serious officials take a sober look at crypto, the reaction is not to light their hair on fire, but instead to recognize it as an innovation. that the U.S. will want to foster and lead while mitigating obvious risks.

Starting point is 00:16:37 The message I take from this EO is that the federal government sees cryptocurrency as a legitimate, serious, an important part of the economy and society, and I think it's a good signal to serious people who have been holding back from getting involved. The EO also presents another striking contrast with alarmist politicians and media, in that it is ultimately a call for further study and deliberate planning, not a reactive rush to legislate or regulate. Nick Carter half jokes about the mining report saying, what's funny is if the government actually commissions a decent study about Bitcoin mining specifically, they will come away sunnier on the space than the hatchet job academia, which currently informs their thinking. What about the crypto advocates in Congress or the Senate?

Starting point is 00:17:20 What do they think? Senator Cynthia Lummis said, it's great to see the Biden administration's growing interest in digital assets. And while I agree with the president's desire to combat money laundering and defend America's national security, I think his executive order misses the fact that the overwhelming majority of digital asset users are law-abiding and trying to make our financial system better. If he has any doubt, he should look to Wyoming, where digital assets are booming within a common-sense balanced regulatory framework. We need thoughtful rules around stable coins, and though I remain unconvinced on the need for a CBDC, I will continue to follow the Federal Reserve's work in this area closely. I will be laying

Starting point is 00:17:54 out my own thoughts on digital asset legislation imminently. Congress is ultimately the arbiter of these issues, and it's time we step up to our conversations and work on real legislation. This, I think, is a part of this whole discussion that is being radically under-discussed, which is the fire that this EO lights under the butts of people in Congress and the Senate to figure out these rules from their perspective as elected officials. Remember, there is a strong argument that rules around a sector of the economy with this much potential importance, significance, and potential for disruption need to come from not career bureaucrats and appointed officials in any administration, but in fact from elected

Starting point is 00:18:37 representatives who can be held accountable for the decisions that they make. There have been numerous bills from Congress and from the Senate over the years around digital asset legislation, but they never have the force of will and the force of focus to actually be seen through, to be debated and to be ultimately voted upon. With Biden pointing the entire government apparatus on figuring this out, that potentially changes that equation in a pretty big way. Whatever the case, there is a bit of a watershed moment about this, right? That's a word used by Jeremy Aller from Circle.

Starting point is 00:19:10 He writes, this is a watershed moment for crypto, digital assets in Web 3, akin to the 96-97 whole of government wake up to the commercial internet. 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. It's rewarding to see this from the White House after so many of us have been making the case for nine plus years. Specifically, the EO calls for nearly every relevant federal agency to take on understanding and developing policy positions that understand and address risks, but vitally that support innovation in U.S. national economic competitiveness. We're at a turning point in geopolitical and geoeconomic systems and history, and the U.S. now has the

Starting point is 00:19:48 opportunity to lean into an open internet native economic infrastructure, while others focus on closed, tightly controlled, and privacy eroding alternatives. In many cases, the EO sets out initiatives to explore and engage in constructive problem-solving around known risks that exist with the legacy financial system and the new Web3 world. Privacy, security, financial inclusion, global competitiveness for the U.S. dollar, and more. And while there is reference to continued research into CBDC, the EO is appropriately focused on the here and now of rapid growth in digital assets and stable coins, and getting it right so that these technologies can flourish in a responsible manner. For those of us in the crypto community, in my humble opinion, this EO should be viewed as the

Starting point is 00:20:28 single biggest opportunity to engage with policymakers on the issues that matter. The proverbial doors of policymakers are wide open. This is now a national conversation in the U.S. So this episode's getting a little bit long, but let's do my quick takes to wrap up. First, more discussion and research is better. This is the point that I harp on all the time when it comes to policymakers. The things that filter into the average policymaker about this industry are an order of magnitude worse than the things that they find when they actually look into it, even if their priors are to make them disinterested in what we have to say. It is simply put, better for the crypto industry to have more regulators understand more about the crypto industry,

Starting point is 00:21:10 warts and all. The fact that basically every relevant body of government is now being ordered to this seriously is a good thing for the industry long term. Second, no new rulemaking. I really just want to point this out. There were exactly two ways that this could have gone. Rushed rulemaking or a chance for further study. It wasn't the version that would have been disastrous, which is the rushed rulemaking, if you care about the future of this space. Three, no more solo agency cowboying. The role of any one agency is significantly diminished in this report. It makes it quite clear that in the view of the president, this is an issue that requires and deserves to have all offices look at from their perspective before any conclusions are made.

Starting point is 00:21:57 Now, on the one hand, that potentially diminishes the role of the offices that are the most initially favorable to crypto, but it also cuts off the influence of those who are the biggest enemies and antagonists. Four, I believe this is another starting gun on CBDCs. You've heard me use that phrase probably numerous times regarding the launch of Facebook's Libra and what that meant for CBDCs around the world. I think this is the starting gun for the U.S. though. The language that the Biden administration is using may not committed fully to a central bank digital currency, but it means that this is now a big national debate and is something that's going to be on the agenda. Fifth, I expect that that statement

Starting point is 00:22:33 that I read from Cynthia Lemmas is just the beginning of a much more concentrated and concerted effort on the part of Congress and the Senate to not surrender their leadership role when it comes to digital asset legislation. And I think that that pressure, that push and pull between the administration and the elected officials is going to be incredibly healthy for where this all lands out. Whatever the case, I think it is very, very clear and undeniable that this is not the thing that the doomsayers had most feared. It is an acknowledgement of the significance of this space and a significant dedication to focus on what the implications are and how the U.S. should think about it. I think that's not bad for a Wednesday's work.

Starting point is 00:23:15 And it certainly means that the next 180 to 365 days are going to be interesting for this little industry of ours. For now, I want to say thanks again to my sponsors, nexo.io, Arculus and FTX for supporting the show. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - A Watershed Moment: Everything You Need to Know About Biden’s Crypto Executive Order

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