One of the surest fire ways for a government to look like it’s doing something is to commission a report. President Joe Biden’s hotly anticipated executive order on cryptocurrency released last week was chock full of such time-buying busywork for basically every federal agency. Everyone from the Department of the Treasury to the Environmental Protection Agency has been tasked with a slew of reports, commissions, and frameworks to study digital assets and how they affect established government authorities.
The resulting EO was greeted by a sigh a relief from the cryptocurrency industry, which had (unnecessarily) feared it portended harsh crackdowns from the feds. After weeks of doomsaying, the Bitcoin price jumped up once everyone had the chance to review the text.
Instead of harsh cryptocurrency sanctions for the purpose of furthering international sanctions, the EO mostly talked about the need for the United States to “lead on innovation”—albeit in whatever way the Biden administration considers to be “responsible and equitable”—with some redundant language about exploring the possibility of creating a “digital dollar” or central bank digital currency (CBDC), an undertaking several years underway at different Federal Reserve banks.
It’s not all good news. Inviting the entire federal government to scrutinize bitcoin and related technologies under a microscope will invite many excuses to try to control a liberating ecosystem at odds with the Washington status quo. Some of the EO’s priorities—political buzzwords like climate change and financial equity—indicate inherent allergies to the open nature of permissionless blockchains. And while this order is not the first to discuss an American CBDC, we should be wary of a whole-of-government move towards a cashless world with mandated government-controlled digital currencies.
Still, the EO is a lot better than it could have been. It was inevitable that governments would turn more attention to bitcoin as it grew bigger and stronger. At the very least, this directive falls far short of enacting any policy at all, let alone hostile ones, and even gives some lip service to the need for America to lead on “blockchain technology.”
Typically, documents that are supportive of some new development will start off with a few flowery sentences about its promise and potential. This order does not even bother with such niceties, instead kicking off with some causes for government concern: consumer and investor protection, financial stability, crime, national security, “human rights,” financial inclusion and equity, and climate change. It then spares a few words for “responsible innovation,” meaning controlled development on the kinds of things that the government would like: “cross-border funds transfers” and “cost-efficient access to financial products and services,” maybe just accomplished with a CBDC.
It’s these concerns that are inherently objectionable on their own. It’s true that cryptocurrency exchanges and services have succumbed to cybersecurity failures and expensive data breaches. Few, if any, in the cryptocurrency community would disagree that “digital payments ecosystems should…include privacy and security in their architecture,” although it is a curious statement for the US federal government, which is not the biggest fan of private encryption, to make.
But some of the “safeguards for consumer and investor protection” that are invoked as solutions have traditionally ended up removing options for everyday Joes while well-connected investors are freer to invest in higher yield opportunities.
Then there are the concerns that are outright hostile to open innovation. Bitcoin is a fantastic tool for financial inclusion because it allows anyone—including the underbanked—the opportunity to “be their own bank” at virtually no cost. Well, the Biden administration is more worried that “the benefits of financial innovation are enjoyed equitably“—there’s that word (emphasis added) again—”by all, and that any disparate impacts of financial innovation are mitigated.” That sounds a lot like a call for enforced equality of outcomes to me.
While the EO fell far short of “banning Russia from cryptocurrency“—whatever that would mean—as some had feared, there is the normal language about money laundering and international sanctions, too. Agencies will have to do some reporting on this as well, with the added specification of studying “sanctions evasion.” Odd, since financial surveillance is arguably the most well-developed body of law surrounding cryptocurrency, but hey, it’s better than bad policy.
There’s a lot of language about “negative climate impacts,” too. When governments talk about the environment and cryptocurrency, it usually means they want to limit bitcoin, which is mined through a consensus mechanism called “proof of work.” Proof of work mining attains validation and decentralization through costly computations. It’s expensive, but worth it. Governments don’t like proof of work because it is almost impossible for them to influence. They would much prefer cryptocurrencies that are pseudo-decentralized or not decentralized at all, I mean, “greener alternatives.”
One such purportedly “greener alternative” could be a CBDC that is completely controlled by a central bank. I suppose this could be “greener” if we set aside the goodly number of emissions required to fuel the infrastructure for our legacy financial system, to say nothing of the US global defense system that helps prop up dollar dominance.
Much of the EO discusses the need to explore a CBDC, both in Section 4 and throughout the document. From the horse’s mouth: “My Administration places the highest urgency on research and development efforts into the potential design and deployment options of a United States CBDC.” Biden’s people believe a CBDC can “facilitate faster and lower-cost cross-border payments,” “boost economic growth” (probably through easier “monetary stimulus”), and most importantly: “support the continued centrality of the United States within the international financial system, and help to protect the unique role that the dollar plays in global finance.” Translation: we need to keep up with China.
Giving government a programmable digital currency without physical cash would mean a God’s eye view of the economy for the central bank. (Biden says “privacy protections” will be built in—yeah, so does China.) Knowing a person’s commercial history is a bit like peeking into a person’s brain. It would be a frightening amount of data for the government to have.
Then there’s the possibilities for control. Money could be programmed to not be spendable on certain things or by certain people. Were you at the wrong protest? Maybe your money doesn’t work anymore. Or maybe as part of the government’s exciting new green economy plan, the eDollar won’t be spendable on high carbon offerings on certain days. Use your imagination.
But while it’s easy to contemplate how such power can be abused, the idea did not come from the EO. Different Federal Reserve branches have been actively studying and prototyping an American CBDC for years. There’s the Digital Currency Initiative at the Massachusetts Institute of Technology with the Federal Reserve Bank of Boston, the New York Innovation Center with the Federal Reserve Bank of New York and Bank of International Settlements, and the Technology Lab (TechLab) of the Federal Reserve Board of Governors.
Maybe more CBDC projects will be created, or these will get more support. But this has been well underway for a while. It’s good that the EO is at least drawing attention to the quiet exploration of a CBDC so that we can learn the risks and the vital need for a private censorship-resistant hard digital cash like bitcoin.
The Executive Order was far from a “success” for the industry, no matter the optimistic language from some about the government “recognizing that we are a serious force.” The most that can be said is that it bought bitcoin and related technologies a little more time, with the catch that basically every federal agency will be scrutinizing it for any possible angle of enhanced government control over the coming year. The good news is that if there’s one thing bitcoiners appreciate, it’s the value of time.