Biden’s executive orders on digital assets may be too little too late

The crypto community greeted President Biden’s Executive Order On Ensuring Responsible Development of Digital Assets with sighs of relief, after much handwringing. They had feared a regulatory tsunami ending many activities in the crypto world. 

Jeremy Allaire, CEO of Circle, liked the fact that the order recognized the rapid growth of crypto assets. He called it a “watershed moment for crypto, digital assets and Web3” and praised the fact that it is a “whole of government wakeup” approach, looking at risks but also opportunities. 

The reason for that may be that the executive order itself does not provide any new or startling information or insights. It covers well-worked ground, spelling out the areas on which the regulatory authorities might well focus. These include consumer and investor protection, financial stability, illicit finance, financial inclusion and responsible innovation. The cryptocurrency community welcomes the order, but it is inevitably a broad-brush approach. Their relief may well turn out to be ill-founded when the consumer protection issues come to the fore and people realize the purchase of stable coins has a price tag attached to it and the costs of international transfers, including remittances, exceed those of other payment systems. Stable coins whose values are tied to a real-world asset such as the dollar might not survive the strong sunlight of transparency.  

All regulatory agencies are required to develop policy recommendations, as part of a national policy for digital assets across the key priorities. Of course, agencies involved already license or regulate certain crypto assets, sometimes at their request, or are in the process of defining and regulating specific assets. These include the Financial Crimes Enforcement Network, the New York Financial Services Department, the Office of the Comptroller of Currency, the Securities and Exchange Commission and the Commodity Futures Trading Commission. It will undoubtedly take time for the agencies to work together to develop a coherent national policy. They might find it helpful to examine the European Union’s proposal for regulation on Markets in Crypto Assets, which was adopted Monday by the European Parliament’s Economic and Monetary Affairs Committee. It provides a comprehensive regulatory framework for crypto assets. But the executive order is what is known in political parlance as kicking the can down the road.   

The problem with the delay is that it leaves America without all the regulatory tools it requires should it be necessary to restrict crypto assets being used to avoid the sanctions on Russian banks. These executive orders have been designed to prevent seven Russian banks from having access to foreign markets or carrying out cross-border fund transfers by denying access to Swift. Bitcoin can obviously be used for these purposes, but not for most ordinary Russians. Bitcoin, however, could benefit the wealthiest there.   

Changpeng Zhao is chief executive of Binance, the largest cryptocurrency exchange in the world by trading volume. Zhao noted that institutional traders, including corporate treasuries, are increasingly adopting cryptocurrencies, giving rise to much larger trades on the exchange. But Zhao has repeatedly made it clear that he will not abide by a blanket ban of Russia. He claims to abide by sanctions on specified individuals but will not impose sanctions on an entire group, claiming that would be “unethical” adding that, “on an ethical point of view, many Russians don’t support the war, so we should separate the politicians from normal people.” 

But there are two problems with this. First, how do we know that his claims are true? Bitcoin, given its pseudonymous nature, makes transactions difficult to detect and therefore easy to bypass sanctions. It is one of the major coins traded on Binance exchanges. As for Zhao himself, he once claimed that Binance is a new kind of organization that does not need bank accounts and postal addresses. That was in March 2020. Apart from a few state licenses in the U.S., it is neither licensed nor regulated anywhere in the world.   

Secondly, how can Binance be held to account and the truth of Zhao’s claims be assessed? Not having a headquarters anywhere makes it so the exchange is not under any jurisdiction and cannot be held to account anywhere. Many investors, as well as regulators, are finding it hard to figure out how and where to take Zhao to court. He may now seek to establish a headquarters, but until that happens, he can flout sanctions at will, claiming in a company statement that a blanket ban would “fly in the face of” why crypto exists. 

Other exchanges such as Coinbase and Kraken refused to cooperate with a blanket ban on all Russian addresses but will abide by restrictions. Kraken’s CEO tweeted that the company “cannot freeze the accounts of our Russian clients without a legal requirement to do so.” All of this is in the context of Russia’s strong support of cryptocurrencies, accounting for 12 percent of the global market.   

The U.S. should have been in a stronger position to regulate and supervise cryptocurrencies by now. It is already behind other countries from whom it could learn. Biden’s tardiness in failing to provide the tools to ensure that sanctions are upheld simply leaves the way open for others to guard Putin’s assets.  

Oonagh McDonald, Ph.D., CBE, is the author of, “Cryptocurrency: Money, Trust and Regulation.”