Digital assets have in the past few years grown from a niche investment to a full-fledged industry. Part of the ever-expanding domain of so-called “Web3,” the market size of the asset class which includes cryptocurrencies and non-fungible tokens (NFTs) reached $3 trillion in November 2021.
As advertisements for crypto firms such as Coinbase dominate the American Superbowl, survey data suggests that 16% of the adult U.S. population have invested in or traded cryptocurrencies. This boom in activity compels financial institutions and governments to examine their obligations and roles.
The Executive Order (EO) on “Ensuring Responsible Development of Digital Assets” released by the Biden administration on March 9 was a hotly anticipated milestone in the discussion on regulating digital assets in the global financial system.
This article examines its content and implications for the development of digital assets.
The growing need for regulation
Since Bitcoin, the original cryptocurrency launched in 2009, digital assets have been hailed by some as ushering a new age of innovation in finance, and branded by others as a threat to its investors and the financial system as a whole.
Regulators must consider how to protect consumers from fraud, address the national security implications of borderless currency, and consider other externalities, such as the effect of energy-intensive cryptocurrency mining on climate change.
Until now, the U.S. regulatory response has been fragmented. Regulation is split vertically, with exchanges regulated at a state level and tokens at a federal level, while responsibility is split horizontally across various agencies, including the U.S. Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC) and the Internal Revenue Service (IRS).
Although multiple bodies have studied various issues and taken action against various companies and individuals over the years, the U.S. has been hesitant to take bold action. Meanwhile, countries such as El Salvador have adopted Bitcoin as legal tender, whereas China has banned the use of crypto entirely.
Governments recognize that the world needs a joint approach to this burgeoning area of the global economy and that the U.S. should provide leadership.
What the EO Says
The EO covers six areas that acknowledge the dangers of digital assets (consumer and investor protection, financial stability, illicit finance) and their potential (U.S. leadership in the global financial system, financial inclusion, responsible innovation).
While broad in scope, the EO makes no definite proposals for new rules. It focuses mainly on directing government agencies to conduct further research and make their own recommendations. The operative words tend to be high-level—along the lines of “assess,” “coordinate,” “establish a framework,” and “support.”
The document does refer to positive future developments, tasking the US Department of Justice to consider procedures for introducing a “digital dollar” or Central Bank Digital Currency (CBDC). Although similar to cryptocurrency, this form of digital asset is centralized.
The EO does not mention draconian restrictions in the pipeline that would impair the growth of the crypto industry. Rather, the spirit is one of embracing digital assets as a matter of necessity.
This spirit is set boldly in the official White House statement accompanying the EO, which states: “The United States must maintain technological leadership in this rapidly growing space [and] a leading role in international engagement and global governance of digital assets consistent with democratic values and U.S. global competitiveness”.
Response and implications
Cryptocurrency markets responded positively to the announcement, with Bitcoin rising 8.4%. Most crypto advocates also interpreted the news favorably.
The Blockchain Association considered the EO as “further proof that the crypto ecosystem is now a vital and inseparable part of the national economy”, while many crypto skeptics were underwhelmed by the vagueness of the proposals, especially given the wide expectation that the announcement would herald a “crackdown”.
Our view is cautiously optimistic. At a minimum, the EO cuts any political grandstanding on the subject and sets an agenda to assess and establish a framework for this burgeoning ecosystem. It also implies that regulators will seek input from industry stakeholders in drafting new laws and setting regulations governing digital assets.
This considered course of action should foster an environment that promotes responsible innovation and financial inclusion and help to establish the guardrails needed to address the scams and illicit activities that have plagued digital assets in the past decade.
A great deal of debate among stakeholders will doubtless continue in the years ahead, which is to be expected given the disruptive force of digital assets.
 Time - https://time.com/6115300/cryptocurrency-value-3-trillion/
 Pew Research Center - https://www.pewresearch.org/fact-tank/2021/11/11/16-of-americans-say-they-have-ever-invested-in-traded-or-used-cryptocurrency/
 Whitehouse.gov - https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets/
 Investopedia - https://www.investopedia.com/terms/c/central-bank-digital-currency-cbdc.asp
 Whitehouse.gov - https://www.whitehouse.gov/briefing-room/statements-releases/2022/03/09/fact-sheet-president-biden-to-sign-executive-order-on-ensuring-responsible-innovation-in-digital-assets/
 The Blockchain Association - https://theblockchainassociation.org/executive-order-on-digital-asset-innovation/
 WSJ - https://www.wsj.com/articles/biden-to-order-study-of-cryptocurrency-risk-creation-of-u-s-digital-currency-11646823600?mod=Searchresults_pos6&page=1