Biden Has His Eye on Bitcoin

Commissioning a report is one of the best ways to make a government look accomplished. Last week’s highly anticipated Executive Order on Cryptocurrency issued by President Joe Biden was packed with such busywork that it cost the agency a lot of time. Every federal agency, from the Department of the Treasury through the Environmental Protection Agency, has been given a variety of commissions and reports to examine digital assets and their impact on established authorities.

It was met with relief by the crypto industry that had (unnecessarily), feared the EO would lead to harsh crackdowns by the federal government. After months of doomsaying the Bitcoin price started to rise once everybody had a chance to read the text.

Instead of harsh cryptocurrency sanctions for the purpose of furthering international sanctions, the EO mostly talked about the need for the United States to “lead on innovation”—albeit in whatever way the Biden administration considers to be “responsible and equitable”—with some redundant language about exploring the possibility of creating a “digital dollar” or central bank digital currency (CBDC), an undertaking several years underway at different Federal Reserve banks.

This is not all positive news. It will be tempting for the whole federal government to examine bitcoin and its related technologies. This could open up many opportunities to make excuses and try to regulate a liberating environment that goes against the Washington system. Some of the EO’s priorities—political buzzwords like climate change and financial equity—indicate inherent allergies to the open nature of permissionless blockchains. And while this order is not the first to discuss an American CBDC, we should be wary of a whole-of-government move towards a cashless world with mandated government-controlled digital currencies.

The EO works a lot better that it should have. As bitcoin grew in popularity and strength, it was only natural that governments would pay more attention. The directive does not even attempt to enact any hostile policy. And it only lip-services to America’s need to “blockchain tech leadership.”

Documents that support a new development usually start with some poetic sentences about the potential and promise of it. The order doesn’t bother to include such fineties and instead addresses some of the causes that government is concerned about: investor and consumer protection, financial stability and crime, national security and “human rights,” equity and financial inclusion, as well as climate change. The order spares no effort to mention “responsibleinnovation,” which refers to controlled development of the types of things the government can control. We wouldYou might be able to do this with a CBDC.

These concerns are what make them inherently unacceptable. Unfortunately, many cryptocurrency exchanges and services are now vulnerable to expensive data breaches as well as cybersecurity failures. Few, if any, in the cryptocurrency community would disagree that “digital payments ecosystems should…include privacy and security in their architecture,” although it is a curious statement for the US federal government, which is not the biggest fan of private encryption, to make.

Some of the solutions that have been invoked to protect investors and consumers are not always effective. However, well-connected investors tend to be more able to take advantage of higher yielding opportunities.

There are also those who are hostile to open innovation. Bitcoin is a fantastic tool for financial inclusion because it allows anyone—including the underbanked—the opportunity to “be their own bank” at virtually no cost. Biden’s administration seems more concerned that the “benefits of financial innovation” are not being enjoyed. Equitable“—there’s that word (emphasis added) again—”by all, and that any disparate impacts of financial innovation are mitigated.” To me, that sounds like an appeal for enforced equality in outcomes.

While the EO fell far short of “banning Russia from cryptocurrency”—whatever that would mean—as some had feared, there is the normal language about money laundering and international sanctions, too. This will require agencies to report on it, and also include the requirement of studying sanctions evasion. It’s odd that financial surveillance is the best-developed area of law around cryptocurrency. But it’s still better than poor policy.

It’s common to hear a lot about the “negative impacts on climate” as well. Talking about cryptocurrency and the environment usually indicates that governments want to restrict bitcoin. This is done through what’s called proof of work, a consensus process. By using expensive calculations, proof-of-work mining is validated and allows for decentralization. This is expensive but well worth the effort. Because it’s almost impossible to control, governments don’t appreciate proof of work. Cryptocurrencies that are not decentralized (or pseudo-decentralized) would be preferred by governments.

A CBDC, which is fully controlled and managed by the central bank, could be one such “greener” alternative. This could seem greener if you consider the large amount of carbon emissions that are required for the legacy financial system to function, not to mention the US global defence system which helps to support dollar dominance.

The EO is largely focused on the necessity to investigate a CBDC in both Section 4 as well as throughout the document. My Administration is putting the horses mouth to it: “My Administration puts the greatest urgency on research, development efforts in the potential design or deployment options for a United States CBDC.” Biden’s staff believes that CBDCs can facilitate faster, lower-cost cross border payments, boost economic growth, (probably by easier “monetary stimuli”), but most importantly: they will “support and preserve the centrality of America in the international financial system and the special role the dollar holds in global finance. We must keep pace with China.

It is undoubtedly alarming. The elimination of any physicality that remains in our money system could almost definitely mean financial privacy being lost and monetary controls not being enforced.

The central bank would have a God-eye view of the economy if it could give the government a digital, programmable currency that does not require physical cash. (Biden says “privacy protections” will be built in—yeah, so does China.) It’s a little like looking into someone’s mind to know their commercial history. The government would have a lot of data.

You have the option of gaining control. It is possible to program your money not to be spent on specific items, or by particular people. Did you go to the wrong protest? Perhaps your money isn’t working anymore. Perhaps the government is implementing a new green economy program that will allow the eDollar to be used for low-carbon products on certain days. You can use your imagination.

It’s not difficult to imagine how this power could be misused, but the idea didn’t come from the EO. For years, various Federal Reserve branches have been studying the American CBDC and creating prototypes. The Digital Currency Initiative is at the Massachusetts Institute of Technology, Federal Reserve Bank of Boston. There are also the New York Innovation Center and Federal Reserve Bank of New York with Bank of International Settlements. And the Technology Lab (TechLab), Federal Reserve Board of Governors.

Possibly, more CBDC projects are created or they will receive more funding. This has been going on for some time. Good that at the very least the EO draws attention to the quietly explored CBDC in order for us to learn about the potential risks and our vital need of a private censorship-resistant, hard digital currency like bitcoin.

The Executive Order was not a successful move for the industry. Despite the positive language of some, it did little to “recognize that we are serious forces.” It bought bitcoin and other related technologies for a bit more time. But, basically all federal agencies will scrutinize it closely over the next year to see if there are any ways they can increase government oversight. Good news: Bitcoiners know the importance of time.