Bitcoin and other cryptocurrencies have been in the news of late for several reasons. The first being that Senator Elizabeth Warren and others have raised an alarm saying that Russia will use the cryptocurrency market to evade sanctions put in place by the U.S. and other nations. As you may have read in a recent piece on this website that is simply not true. The primary reason is the size of the crypto market, or should we say lack of size. There simply isn’t enough market cap to allow Russia any kind of economic traction. The second event that has struck a chord across the government and the financial markets was the recent Executive Order by Joe Biden on the many roles of cryptocurrencies.
Whether you are a seasoned crypto investor, a neophyte with some basic understanding, or completely oblivious to the realm, this Executive Order has if nothing else brought Bitcoin and the other cryptos onto the front page of the news. As one might expect the markets reacted favorably, with the S&P 500 up some 2.5% and Bitcoin up almost 10%. This is not a new phenomenon. Markets don’t like uncertainty and unpredictability. Fear of the unknown causes volatility, which causes acid indigestion for investors. The fact that the U.S. is taking the lead in beginning to look at the risks as well as the benefits of cryptocurrencies is good for all. So what exactly is in the Executive Order and what comes next for the crypto markets? Let’s take a look at the key areas that were targeted in the order.
Consumer and Investor Protections
This of course would be first on any governmental order. As is the mission of the SEC and other agencies, protecting the average investor is of the utmost importance. Perhaps more so than any other asset class currently, the importance of safety in cryptos is key to its future success. The Biden administration is calling on the Treasury to assess and develop policy recommendations on crypto. It also wants regulators to ensure sufficient oversight and safeguard against any systemic financial risks posed by digital assets.
There are nefarious characters in all corners of the financial markets, but perhaps none more so to date than that of the crypto markets. One hears the stories of hackers stealing from exchanges, wallets, and practically every area where digital coins can be stored. This is a huge issue that must be solved before the asset class can go from risk-on to being a more mainstream sector of one’s portfolio. According to the order, Biden has called for, “Unprecedented focus of coordinated action from federal agencies in mitigating illicit finance and national security risks posed by cryptocurrencies.” He is also urging international collaboration on the issue.
And of course what democratic Executive Order would be complete without the mention of the most serious current concern to mankind, climate change. Those with no involvement in the space must wonder what in the world does climate change have to do with a Bitcoin. Well, it’s subtle, but largely political as one might suspect. Bitcoin relies on a mechanism known as proof of work to confirm transactions and generate new units of currency. A decentralized network of computers competes to solve complex math puzzles in order to mine the cryptocurrency. The more computing power a miner has, the higher their chances of being rewarded in new bitcoin. This issue is evolving and has led to other leading coins like Ethereum to move to what is known as Proof of Stake. Not to get to intricate, but it requires users to stake their Ethereum to become a validator in the network. Validators are responsible for the same thing as miners in proof-of-work, ordering transactions and creating new blocks so that all nodes can agree on the state of the network. Among the popular benefits to this method is that it is more energy efficient.
U.S. Competitive Advantage
America has been the global leader in just about every aspect of technological growth in the past, and in order for us to continue as a world economic leader we need to take the lead in regard to how to drive the next wave of technology. Part of the language in the White House announcement focuses on giving the U.S. a competitive edge over other countries when it comes to crypto development, which is significant currently with China putting its crypto mining and use of cryptocurrencies on hold. The Blockchain Association, which is an advocacy group for the digital community agrees that it is imperative at this time to take the global lead in all things block chain and digital.
The time has finally arrived for the U.S. to consider a digital dollar, and closely analyze the risks and rewards of it. This is especially true as China is at the forefront of creating their own digital currency, which would ostensibly be used for commerce as one would imagine, but there will surely be more nefarious tracking aspect of the digital yuan that will affect the lives of the everyday Chinese citizen, and not in a beneficial way. The Federal Reserve last year began work on exploring the potential issuance of a digital dollar. Biden isn’t saying whether the U.S. should launch its own digital currency. Rather, he’s calling on the government to place “urgency” on research and development of a potential CBDC.
All in all this bodes well for the asset class as a whole. “I’m really excited that there will be an opportunity to be part of discussions to keep the US a leader in this space,” says Kristin Smith, executive director of the Blockchain Association, an industry group. It’s important to note that the tone of the order was not solely risk based, but highlighted the need to study the reward side of the equation. “People were concerned it would focus solely on the risks,” says Blake Estes, a partner at Alston & Bird, who focuses on fintech. “Hopefully, it gives more serious people comfort that they can enter the space and do serious projects and they won’t be regulated out of existence.” Only time will tell, but all accounts deem this as a good first step.