The gradualist approach of US president Joe Biden’s executive order on digital assets and distributed ledger technology makes it likely that some elements of international regulation will move ahead of the US, according to former regulators.

“We will get to consensus and normalization amongst something like the G7, European Union or the D10/15 alliance of democracies. I have a feeling that will move faster than the US legislative process [but] I could be wrong,” says Sultan Meghji, who was the Federal Deposit Insurance Corporation’s (FDIC) first chief innovation officer until February 2022.

The Basel Committee on Banking Supervision has already consulted on a first draft of prudential rules for crypto assets, with a further draft expected this year. The Financial Stability Board published high-level recommendations for the regulation, supervision and oversight of global stablecoin arrangements in October 2020, and has started reviewing those recommendations with a view to publishing updates by July 2023.

Several monetary authorities, including the US Federal Reserve, are also working on central bank digital currencies, and the Bank for International Settlements (BIS) is seeking to co-ordinate them to enable cross-border settlement.

By contrast, although the executive order was presented on March 9 by President Biden’s director of the National Economic Council Brian Deese as the US’s “first-ever comprehensive federal digital assets strategy”, sources say it is neither a strategy nor comprehensive.

“I don’t think that this executive order constitutes a coherent strategy. It’s acknowledging that there are some benefits to digital assets and that we want to harness those benefits while addressing the risks…You could apply that to anything,” says Lee Reiners, executive director at the Global Financial Markets Center at Duke University School of Law and a former New York Fed staffer.

Notably, the order gives equal weighting to the risks and opportunities of cryptocurrency and blockchain technology, in contrast with the more cautious statements made by Democrat federal financial regulators to date.

Crucially, six sources say regulators were looking for clarity on who has responsibility for overseeing cryptocurrency, and for legislative proposals where needed. Neither has been provided.

“It doesn’t go into meaningful detail to understand how you could take this vision to say: this [digital asset] should fall inside the statutory and regulatory perimeters [of this agency],” says the FDIC’s Meghji.

I don’t think that this executive order constitutes a coherent strategy

Lee Reiners, Duke University School of Law

Brett Redfearn, former director of the Securities and Exchange Commission division of trading and markets, who is now an adviser at crypto investing firm Securitize Markets, agrees: “The specifics relating to the SEC, CFTC [Commodity Futures Trading Commission] and other financial regulators are light.”

Federal Reserve chair Jerome Powell told a BIS event on March 23, 2022: “Our existing regulatory frameworks were not built with a digital world in mind. Stablecoins, central bank digital currencies, and digital finance more generally, will require changes to existing laws and regulation or even entirely new rules and frameworks.”

But the report mentions none of these, simply stating that its aim is to deliver safe and equitable digital asset markets, with no immediate solutions on how to get there.

“In the short term, it’s hard to see it having any significant impact in terms of a legislative bill, or those efforts are, in some respects already underway for some of the issues that are raised in the executive order,” says Alexandra Steinberg Barrage, a former associate director for policy at the FDIC, who is now a partner at law firm Davis Wright Tremaine.

In the absence of legislation, sources believe crypto firms are more likely to challenge enforcement actions by regulatory agencies through the courts. Lawyers for cryptocurrency issuer Ripple and holders of its XRP coin have suggested in recent weeks that the SEC will be forced to settle ongoing litigation over a December 2020 enforcement action that accused Ripple of an unregistered securities offering.

“The marketplace doesn’t really seem to think the SEC is a slam dunk win on the Ripple XRP case, so I actually think… if there’s not more clarity, there’s more litigation,” says Reiners.

Similarly, CFTC chair Rostin Behnam has appealed to Congress to extend the agency’s authority to police US crypto spot markets. These are currently unregulated, meaning crypto exchanges such as Coinbase, Gemini and Kraken are not overseen by federal agencies.

Clock is ticking

The one substantial aspect of the executive order is a call for 18 reports from 17 government departments and executive agencies and the seven federal financial regulators. The deadlines for these range from between four and 12 months, and the issues involved are as varied as central bank digital currencies, national security, cryptocurrency’s implications for climate change, and financial inclusion.

Any moves toward legislation would need to happen after the reports are published. That extended timeline is likely to take Congressional consideration beyond the mid-term elections in November this year. As a result, crypto-skeptic Democrats fear a win for the more crypto-friendly Republican party in either house of Congress will limit the scope of any future crypto regulation bills.

“I’m very worried that the Biden White House is going to partner with Republicans in Congress to enact crypto legislation just for the sake of showing bipartisanship,” says one progressive source.

[Crypto] really does turn traditional American politics on its head

Sultan Meghji, former FDIC first chief innovation officer

Several sources say the order’s flimsiness—and a delay to the publication date from early February—were partly a result of disagreement within the Democrat party on how to deal with digital assets. The party is split between crypto-skeptics who primarily see risks and those who perceive benefits and are therefore cautioning against regulatory heavy-handedness. Meghji also believes crypto divides both parties across generational lines.

“You’ll see people like Senator Warren, who’s fairly anti-crypto and very strongly anti-banking oligarchy as well,” says Meghji. “And then you’ll have a lot of younger people in Congress who see crypto and web 3.0 technologies as a way to introduce more equity into the system and more transparency—it really does turn traditional American politics on its head.”

The progressive source says there are even disputes within the White House itself, with an earlier draft “watered down” to remove more direct recommendations for actions by the Fed and the SEC.

Perhaps more importantly, digital assets are not a priority for the Biden administration, several sources say. Worries over rising inflation and interest rates, the Russian invasion of Ukraine, ensuing sanctions and climate change all take precedence.

“The White House has a lot on its plate. It does not really want to focus on this, but I think they’ve been feeling heat to do something,” the progressive source says.