Executive orders typically direct a group of federal agencies to take an action, not take an action, and of course, write voluminous reports. President Biden’s March 9
But like many executive orders, it is 70% symbolic and thirty percent punch list. Not surprisingly, accolades poured in as markets relaxed. Crypto advocates were relieved because the order opted not to force them to walk the plank as is occurring in countries like China and the U.K., which have taken note of the energy and financial issues that they raise. The order has transformed tech professionals into veritable biblical scholars who are conjuring every possible prophetic meaning out of it. Unfortunately, it contained far more words than new ideas, and most important, it failed to place appropriate emphasis on three critical gating issues.
The order should have recognized the work already done by the agencies and reset the stage by directing them to resolve foundational issues that seem to be going unanswered. First, when and how can crypto be trusted to transmit trillions of dollars of value in an insecure virtual world? Second, how will an expanding crypto market impact financial market liquidity, capital and credit availability? Finally, what role should the states play in nurturing and regulating virtual currencies and assets?
Through no fault of its own, this order was late to the party. Bitcoin appeared in early 2009, when whoever Satoshi Nakamoto is posted a message: "Bitcoin P2P e-cash paper." But its predecessors, Mondex and DigiCash, had emerged in the mid-1990s, raising many of the critical issues that we hear repeated today.
Who should be allowed to issue cryptocurrencies? When should they be considered deposits? Will they be subject to the criminal prohibitions of the Glass-Steagall Act? Should they be insured by the FDIC? Are they securities? How will they impact monetary control and central banking? How do they — particularly, central bank digital currencies — impact data collection, privacy and government intrusion? How will they enable or hamper the war against money laundering? Will they decrease financial institutions’ liquidity and lendable funds? Will they impact financial stability? Most importantly, what happens when they fail? Many of these remain unanswered.
The order includes the right words — studies of crypto assets should include an assessment of possible benefits and risks for financial stability, systemic risk and payment systems — but those words deserve more than just passing lip service. Policymakers should stop whistling past the enormous impact that cryptocurrencies and assets can have on the heart and soul of the country’s current financial system — its liquidity, capital, and credit availability. That is not to suggest that change and innovation should not occur, but it does mean that policymakers should understand the impact that innovations will have so that they can be prepared to steer around the financial dislocations that rapid movements of capital and liquidity inevitably have.
In the last two centuries, examples abound. Consider the unanticipated and highly disruptive impact of consumer deposits pouring into money market funds in the early 1980s, when they were able to offer double- digit interest rates and snatch massive amounts of deposits from banks that were prohibited by law from paying more than 5.25%. With the crypto market already at $10 trillion when the values of cryptocurrencies, derivative crypto securities and leverage are aggregated, the characteristics of markets are already changing, raising the specter that there will inevitably be fewer consumer deposits to fund the loans that banks make to consumers. Similarly, to the extent that crypto and fintech services circumvent banks, which are still the principal focus of prudential regulation and financial stability, systemic risk will naturally migrate to places where it will be least regulated. That didn’t work out so well in the subprime lending crisis.
Finally, the order should have addressed the role of the states. For better or worse, the United States still has a dual banking system. In fact, the states have been very active in courting and regulating cryptocurrencies, exchanges and related financial technologies. They also have demonstrated an unwillingness to surrender one inch of jurisdiction or potential assessment fees to the federal government. Whether the federal government likes it or not, for the moment the states are there and asserting their jurisdiction. The order does mention the need to consult with international partners, but all 68 times that it uses the word “states,” that word is preceded by the word “United.”
By deflecting attention away from critical issues like security, market impact and state involvement, the order misses the forest for the trees. By designating the next year for federal policymakers to think and write about the issues, it is defaulting to markets to decide the critical issues. Allowing markets to decide is not bad, but being unprepared for the result always is.
