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White House Planning Executive Action to Regulate Cryptocurrencies

The world of the crypto sector – cryptocurrencies and digital assets – has been called the “wild west” of the financial sector. But that may be about to change. In fact, we could be facing centralization of a product that is most loved because it is decentralized. But some sources suggest that “proper legal and regulatory treatment of Blockchain technology is overdue.”

At Web3 Law Center, we want our readers to be informed on what’s happening in the world of Web3 and the crypto sector. In this article we discuss the possible executive action and the opposing opinions about regulating a decentralized market.

Executive Action to Regulate Cryptocurrencies

The Biden Administration is currently planning an executive action that would have federal agencies regulate cryptocurrencies and digital assets. President Biden believes regulating digital currencies is a matter of national security. Efforts to regulate the crypto sector are being coordinated with national and global regulators and leaders. The National Security Memorandum is expected to be announced in the coming weeks.

The White House isn’t only targeting Bitcoin with their efforts. The executive action would also target stablecoins and NFTs (non-fungible tokens).

  • Stablecoins are cryptocurrencies that are backed by other cryptocurrencies or other forms of reserve currency. Some of the more popular stablecoins today are Tether, TrueUSD, Basecoin, and MakerDAO’s DAI (DAIUSD).
  • NFTs are non-fungible tokens, meaning they are unique and cannot be replaced with something else. NFTs are digital assets that are held on the Blockchain. Generally, NFTs are assets like art, music, gifs, and other unique digital items.

Numerous regulatory agencies are coordinating an investigation into whether cryptocurrencies should be regulated – i.e. registered as securities. So far, the Internal Revenue Service (IRS), Securities and Exchange Commission (SEC) Commodity Futures Trading Commission (CFTC) and the Financial Industry Regulatory Authority are all taking part in the review.

Not only will ongoing efforts to regulate cryptocurrencies include an assessment of opportunities and risks, it will also continue the discussion on whether the United States needs a central bank digital currency, or CBDC. A person familiar with the Biden Administration’s plans says,

“This is designed to look holistically at digital assets and develop a set of policies that give coherency to what the government is trying to do in this space.”

The President’s Working Group on Financial Markets has recommended that only banks be allowed to issue stablecoins. Regulators are now tasked with assessing risk and coming up with regulatory plans of action that make sense given the multifaceted nature of the crypto sector.

Regulatory Agencies will Scrutinize Crypto Sector

When there is concern about a particular sector in the financial industry, regulatory agencies conduct invasive and extensive audits and examinations. Generally, that includes interviewing key players within those platforms, scrutinizing trading activities, and investigating potential security risks. Regulators will investigate for instances of fraud, money laundering, shady business practices, wash sales, market manipulations, and pump-and-dump schemes.

Cryptocurrencies, including Bitcoin, are not securities, which raises some questions about how regulators will complete their review. There are also concerns about how regulation would impact digital assets and the individuals and businesses that hold them. If regulators find irregularities, it could have a major impact on the crypto ecosystem – a system which is now too big to fail.

Irregularities could result in tax levies and substantial fines being extracted from everyone who is involved in the crypto sector. These levies and fines would be in addition to any infrastructure the IRS is already implementing for reporting capital gains and losses associated with cryptocurrency.

Legislator Opinions on Regulation of Crypto Sector

Many legislators are voicing their opinions on the crypto sector, including whether there should be crypto regulation. There are fairly stark partisan divides between Democrats and Republicans on how the crypto sector should be regulated.

Senator Cynthia Lummis (R-WY) is one of the most vocal supporters of Bitcoin. Sen. Lummis plans to introduce a bill relating to crypto regulation that would fully integrate digital assets into the U.S. financial system. The proposed bill will provide guidance on assets, classification, new tax rules, and how to protect consumers. It would also create a separate crypto regulatory agency under join jurisdiction of the CFTC. Senator Pat Toomey (R-PA) is also putting up a set of guidelines for how regulation of crypto and stablecoins could happen.

SEC Chair Gary Gensler believes that crypto assets should be classified as securities, and regulated under those guidelines. Analyst Jaret Seiberg also supports this change, saying

“The SEC is going to try in 2022 to regulate stablecoins similar to Money Market Mutual Funds. That means liquidity and disclosure requirements.”

The U.S. Treasury Department is expected to reveal more information on their proposed infrastructure bill that Congress passed last year. Congress has also been asked to draft rules related to stablecoins. There is also talk that the U.S. government should include economists and government competition lawyers in the discussions of regulation, but it is unclear if this will happen.

Talks of Regulation Come at Difficult Time for Financial Sector

The Biden Administration’s efforts are hitting at a time when there is a lot of turmoil in the stock market and cryptocurrency sectors. With both sectors losing value, the Federal Reserve plans to raise interest rates in order to “cool down” inflation. But crypto traders are skeptical of interest rate increases and stimulus scale-backs.

The crypto sector is large and gaining traction regularly. Major cryptocoins like Bitcoin, Ethereum, and Solana continue to dominate the crypto market. But even these major players have seen the ups and downs of a changing and sometimes volatile market.

There is some speculation that talks about regulation could be a means of offsetting some of the huge debt that the U.S. is racking up with multitrillion-dollar infrastructure bills. Perhaps there is room for regulators to extract money from the crypto space that could flow back into the U.S. financial ecosystem.

Will Consumers Support Crypto Regulation?

Regulating cryptocurrencies could help investors, but what about consumers? One of the primary draws to cryptocurrency and Blockchain technology is the decentralized nature of the sector. Consumers consistently voice support for a decentralized way of doing business and managing transactions. Will regulating cryptocurrencies drive a wedge between consumers and the government?

Opponents to regulation argue that regulating cryptocurrency would not only go against the very nature of the sector, but it would also damage innovation and bring crypto prices down. Crypto prices are already plummeting as news of regulation increases. Part of what has made cryptocurrencies successful is the fact that they are decentralized and disrupt the traditional power of big banks and corporations. If regulation takes that away, will crypto still have the same draw to consumers?