What Biden’s Crypto Executive Order Will Mean for Banking and CBDCs

Actively exploring a central bank digital currency for the U.S. is termed of the 'highest urgency' in a much-anticipated presidential executive order. Biden's apparent leaning towards a CBDC increases worries for banks, but digital asset industry figures feel encouraged by the order. There's irony, too, in that money market funds, yesterday's disruptors, may get disrupted by crypto themselves.

President Biden’s massive executive order mandating a slew of studies of digital assets — including cryptocurrency, stablecoins and a central bank digital currency for the U.S. — has been cheered and jeered and sometimes puzzled over.

But the bottom line is that the early March 2022 order has officially moved digital assets from a fast-growing sideshow to the center ring of traditional money and payments. Hundreds of companies here and abroad, as well as a growing number of banks, participate in the business in one way or another.

The document, “Executive Order on Ensuring Responsible Development of Digital Assets,” runs 16 tightly spaced pages, long enough that more than one commenter remarked on the length. “Digital assets” has become the collective term.

In a staff-level briefing concerning the executive order, a government official noted that nearly 20% of Americans now own some form of crypto investment. The administration officials conducting the briefing noted, among many issues, that the digital asset field needed to be evaluated for “inclusion” as well as the potential for “disparate impact” on minorities and other groups. That alone suggests digital assets have matured — those terms have typically been applied to traditional banking, generally in an equal opportunity and fair lending context.

When Washington starts discussing financial, criminal, systemic and other risks of an activity, bankers and credit union executives instinctively cringe in anticipation of more regulation.

Many elements of the digital assets community are welcoming the possibility of regulations that the Biden executive order raised, at least based on what they’ve seen so far.

Crypto Keeps Getting Bigger:

For Millennials crypto investments have become mainstream. Research by Cornerstone Advisors indicates that 30% of Millennials have crypto investments and 27% expect to buy them in 2022.

One Side: ‘Regulation May Help Digital Assets Industry, So Bring It On’

Observers interviewed frequently said that the Biden order was notable for not creating policy at this point, but chiefly a long “to-do” list covering over a dozen federal government agencies and entities operating in a “whole-of-government” approach meant to result in comprehensive studies from every conceivable angle.

“The order is a really positive step in the right direction for the digital assets sector,” says Ashley Harris, General Counsel at Figure Technologies, and chair of the USDF Consortium board. USDF is a bank-issued stablecoin. “There was a lot of concern about the executive order as it was being drafted, about whether it would turn out to be really proscriptive or even constrain activities that are currently underway. By contrast, it underscores that digital asset activity is here to stay, is important to U.S. competitiveness, and an important part of U.S. financial leadership.”

Harris adds that the Biden administration appears to want to “harness the benefits of digital assets, while making sure that this is done in a safe, regulated manner.”

When rumor of the order began last fall, “the big fear was that it would mean some kind of crackdown on the industry,” says Nikhilesh De, Managing Editor, Global Policy & Regulation at CoinDesk. “Instead, what we saw was an order that directed federal agencies to study the issues and come up with guidance. But it did not prescribe any specific paths that the administration hopes that the agencies take.”

De says that what the digital assets industry craves more than anything else is certainty and a more unified and streamlined approach.

On the other hand, De adds, the executive order also speaks to concerns that if Washington bungles its evolving approach to digital assets, it could set up a scenario of regulatory arbitrage. In other words, companies might seek out more favorable regulatory environments in other countries.

Read More: Should You Follow Chase Bank Into the Metaverse?

Competition and Regulation for a Once Stateless Channel

The order and statements by administration officials devote a fair amount of verbiage to issues of maintaining U.S. competition and there appears to be a striving to offer a handshake at the same time that rules are in the offing.

However, “words are cheap in talking about American competitiveness and things like that,” says Adam Shapiro, Partner and Co-Founder at Klaros Group. Shapiro, who spent part of his career with U.K. regulators, notes that the digital assets order directs the Attorney General, the chair of the Federal Trade Commission and the director of the Consumer Financial Protection Bureau to evaluate the impact of digital assets on competition policy.

Indeed, Nik De observes that it’s early days and that “fear is always lurking in the background. It could be that we’ll wake up and the Treasury Department, the Commerce Department and the national security agencies will come together and say, ‘All right, we’ve looked at this, and we don’t like it’.”

At one time, early in the evolution of blockchain and related technology, financial services delivered through that channel were envisioned to be stateless and completely self-regulating.

“That was very aspirational, but, realistically, there’s always going to be government oversight and interplay, primarily around the on- and off-ramps,” says Scott Durant, Senior Director at Kroll Bond Rating Agency and co-author of a recent major report on digital assets.

Read More: When Will the U.S. Have Its Own ‘Central Bank Digital Currency’ (CBDC)?

The Other Side: ‘Regulation May Restrict Digital Assets Business, So Bring It On’

There are experts who would like to see the digital assets business well corralled with oversight and rules.

“It is so important that there be regulation, because we’re in the middle of seeing a gigantic shadow banking system being built up — and we all know where that ends,” says Martha Bennett, Vice President and Principal Analyst at Forrester.

“The agencies and regulators in the U.S. really need to get their act together and move on, putting in place some regulation — and not be intimidated,” says Bennett.

“I think the signal being sent to the agencies involved is, ‘Get your act together and DO something!’ And yet it is interesting that the executive order isn’t prescribing any action, other than the studies.”

— Martha Bennett, Forrester

Bennett believes action is essential, because many aspects of digital assets, to her, are “the Wild West. And it is getting to the point where this is not just those involved in that ecosystem hurting themselves. The more anything to do with crypto bleeds into existing financial systems, the higher the chance of systemic risk becomes.”

Veteran regulator and banking attorney Thomas Vartanian goes further than that. “I think crypto is a crisis waiting to happen,” says Vartanian — and he doesn’t think anything in the executive order will come anywhere near solving the problem.

Vartanian wrote 200 Years of American Financial Panics in 2021 and in the course of researching that book and its upcoming sequel, traced the seeds of financial disasters.

“When I look for clues as to the next financial crisis, I look for the kinds of market events that have some elements of speculation in them,” says Vartanian. “They tend to have elements of a rapid increase in size and an instantaneous reallocation of capital and liquidity across the country.” That is happening with the crypto market, which could impact the traditional money markets.

An advisory report by Fitch Ratings expresses concerns now for the money market mutual funds in the wake of the executive order’s favorable mention of an American CBDC. Money market funds were once the disruptor of bank accounts before rates were deregulated in the 1980s.

“U.S. money market funds and other cash investments in the financial system could face disruption if a central bank digital currency is introduced,” the advisory states. “Potential unintended consequences of a CBDC include money market fund outflows that could be made worse in times of stress.”

Critical Transactions Built on a Sketchy Foundation?

In terms of the Biden executive order, “there is just not much there in terms of where we are historically with these issues,” says Vartanian. “Crypto has been around for 13 years or so and we’re just now coming to grips with it.”

“The euphoria of technology has captured everyone, including the government. But we are piling every ounce of data and every inch of value onto an internet that’s insecure.”

— Thomas Vartanian, Financial Technology & Cybersecurity Center

In his forthcoming book, Unhackable, Vartanian calls for a more-secure internet setup. He says he has been through every government issuance over the last 25 years. None, he says, addresses the problem that major financial operations now rely on today’s internet.

“The pioneers of the internet will tell you that they didn’t build it thinking it would be used for anything important,” says Vartanian. The latest executive order, to him, just kicks the can further down the road. Meanwhile, he worries, more money, in the form of digital assets including CBDCs, will move via unreliable internet channels.

Such concerns could gather momentum as research progresses. While the digital asset industry had a right to be pleased with the tone of the executive order, Klaros Group’s Adam Shapiro says the outcome of the various studies may not be as pleasing.

“There are a bunch of people in those government organizations who are already on the record as being deeply skeptical about this industry and what it means for consumers,” says Shapiro. “It’s the first inning of the game and it started well, but there’s an awful lot that could go wrong if the industry doesn’t engage smartly here.”

Central Bank Digital Currency Gets a Biden Nudge

While President Biden’s order doesn’t specifically mandate creation of an American CBDC, its language is being read as something of an action call.

“There was a clear emphasis around CBDC,” says Jonah Crane, Partner at Klaros Group. “The sense of urgency that they showed around that was notable. There’s a sense that they do feel the need to compete. There’s a quote in there about showcasing U.S. leadership, which is interesting. And, clearly, the industry is responding to that.”

By “industry” Crane means digital asset companies.

“A large swath of the banking sector is worried about the creation of a CBDC, and they are probably more nervous about one now than they were before the executive order came out.”

— Jonah Crane, Klaros Group

The Bank Policy Institute has been concerned about the impact of a CBDC on funding for lending. However, Shapiro says the banking lobby needs to do more than resist creation of a CBDC. There are roles private banks could play should one be created, he says, and “it would be a wasted effort by the banking industry if they treat this solely as an area to play defense in.”

Logistically, says Crane, the executive order advances the CBDC concept because the Federal Reserve has proceeded slowly and methodically. Fed policy has been not to move forward beyond research “unless and until there’s support from Congress and the executive branch,” says Crane. “I think some of the reports coming out of the order are designed to lay the groundwork for the Fed to proceed.”

He adds that there is no prejudgment of the issue, but a clear indication that the Biden administration considers CBDCs to be important, using the words “highest urgency” in the context of research and development of CBDCs.

Crane notes that the executive order also instructs the Justice Department and Treasury Department to consider what legislative changes would be needed to implement a CBDC.

“This is designed to inform the congressional debate,” he says, and would specifically address the rest of the Fed’s concern about having a mandate to move forward. The Fed has published both a CBDC policy paper and a technical paper on central bank digital currency thus far.

Why Rush American Finance into the CBDC Age?

The “urgency” is not shared by all observers and they point to the risks a CBDC could pose to traditional banking.

Forrester’s Martha Bennett feels the broad support and desire for faster payments in the U.S. sometimes gets mixed up in the CBDC debate. Faster payments doesn’t need a CBDC, though she says that many technologists in the digital assets space push the CBDC as supportive of their own digital asset payments concepts.

“I’m with [Fed Chairman] Jay Powell on this, when he says we need to look at this very carefully because the U.S. dollar is still the world’s reserve currency,” says Bennett. “While that importance has been declining over the years and will decline further, that’s not because of any digital asset initiative, nor because of China’s digital yuan.”

Bennett adds that China’s pending pilot was prompted by the Chinese government’s desire to reassert control over payments as digital apps took over more and more of the transaction stream there. That isn’t a significant factor in the U.S., she says.

Tom Vartanian is concerned but also skeptical. “I think it is a full frontal attack on the dollar as the global reserve currency,” he says. “The more that commerce moves away from the dollar, which is now the currency on less than 60% of global trade, the more that sanctions become obsolete and the U.S. becomes a secondary economic power. We are being confused into thinking we have to compete with a digital yuan that was hatched before it was ready.”

Fears of disintermediating the banking system should a CBDC be adopted are also a factor.

Shapiro suggests the Fed might implement CBDCs in some kind of partnership with banks, perhaps using some type of wallet.

Where the Biden Executive Order Leaves the Digital Asset Revolution

One point that most observers interviewed agreed on is that, in spite of the favorable language regarding CBDCs, that there is nothing seen in the order that appears to be playing favorites with any form of digital assets. The consensus, for now, is that all forms will continue to develop, and Crane and Shapiro of Klaros Group indicate that clients in the digital assets space continue with their plans in the wake of the order.

“I don’t think anybody’s put any business initiatives on the back burner as a result of the order,” says Shapiro. “It doesn’t make sense, in terms of the market dynamics, which are probably still going to be more important in the long run than the results of all these reports.”

Adds Ashley Harris of USDF Consortium: “The order’s a good framing of the conversation. But the devil’s in the details.”

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