The Biden Administration’s Executive Order on Digital Assets Will Shape The Future of TradFi and DeFi

The government embraces financial technology innovation while calling for responsible development and appropriate protections.

Apr 03, 2022

This week’s newsletter covers The Biden Administration’s Executive Order (EO) on Ensuring Responsible Development of Digital Assets and its accompanying Fact Sheet.

The EO from the White House on ensuring responsible development of Digital Assets is a massive vote of confidence in Digital Assets as a concept and gives great visibility into how Decentralized Finance (DeFi) crypto natives and Traditional Finance (TradFi) incumbents should approach assets and projects. Partly due to the fact that this market has seen explosive growth, surpassing $3 trillion in total market cap last November, this has triggered scrutiny and guidance by the executive branch as well as regulatory bodies.

The intent of the EO includes addressing the significant implications of digital assets, including consumer and business protection, minimizing risk to the stability and resiliency of the financial ecosystem and national security. The EO also specifies these protections should be implemented all while promoting responsible financial innovation. The US must continue to maintain competitive advantage in all aspects, and the future of finance is no exception. This requires common sense regulation that unleashes innovation for the TradFi and DeFi organizations establishing the hybrid future of finance technology.

Let’s examine the 7 key measures further that the EO defines for Digital Assets enablement.

Highlights of the Executive Order.

As summarized in the accompanying fact sheet to the EO:

Measure 1 - Protect U.S. Consumers, Investors, and Businesses. Direction to the Treasury to assess and develop recommendations on policy to address the implications of the growing digital asset sector and changes in financial markets for consumers, investors, businesses, and equitable economic growth.

Measure 2 - Protect U.S. and Global Financial Stability and Mitigate Systemic Risk. DeFi must be governed similarly as TradFi: in order to protect US and global financial stability and risk mitigation, digital asset issuers, exchanges and trading platforms should be subject to and compliant with TradFi equivalent standards, also referred to as “same business, same risks, same rules” such as KYC; however it should also help evolve regulatory approaches as well.

Measure 3 - Mitigate the Illicit Finance and National Security Risks Posed by the Illicit Use of Digital Assets. Address the issues posed by the illicit use of Digital Assets, namely with money laundering, cybercrime, terrorism and ransomware but also with circumvention of sanctions and other similar financial authorities.

Measure 4 - Promote U.S. Leadership in Technology and Economic Competitiveness to Reinforce U.S. Leadership in the Global Financial System. This measure suggests that a framework should be established to drive U.S. competitiveness and leadership in, and leveraging of digital asset technologies. This framework would be the bedrock by which agencies can integrate policy, research and development, and operational approaches to digital assets.

Measure 5 - Promote Equitable Access to Safe and Affordable Financial Services. A huge value proposition for Digital Assets is the potential to “bank the unbanked”. Digital Assets is a key to unlocking equitable, sage and affordable financial services access to those that are underserved.

Measure 6 - Support Technological Advances and Ensure Responsible Development and Use of Digital Assets. Our nation must promote innovation and competitive advantage of financial technology: responsible development and adoption of digital assets should be supported but also in a way that addresses privacy, security, and protection against illicit activity.

Measure 7 - Explore a U.S. Central Bank Digital Currency (CBDC). We must explore Central Bank Digital Currencies (CBDC): research and development of potentially design and deployment options of CBDCs, as sovereign money is at the core of a well-functioning financial system, macro policies, and overall economic growth.

Additional observations.

No mention of DeFi or Decentralization. Unfortunately, no mention of decentralization (e.g. decentralized cryptocurrencies such as Bitcoin and Ethereum, smart contracts platforms, and DAOs), which is a critical component to how DeFi operates and its vision for the future of finance as opposed to TradFi incumbents that are mostly centralized in nature of products, services and ecosystem. And for that matter, no specific blockchain projects or assets of any kind are identified other than CBDCs in a largely agnostic EO. Additionally, CBDCs as a concept generally take a very different approach as pure play cryptocurrencies and other digital assets, and this philosophical viewpoint is not clearly reconciled. When you consider how TradFi and DeFi is heading for a highly converged, hybrid future, it is imperative that federal government guidance and regulation catches up to the reality of DeFi as a concept that is being adopted by consumers and institutions.

General support without sweeping near term reforms. On the positive side, the EO seems to generally support innovative financial technology and digital assets without making broad, sweeping near term reforms that may be short sighted and uneducated around a nascent yet rapidly evolving space. This could be a great thing for the industry to show sponsorship, promote innovation, and allow for a two way conversation with government and industry to enable common sense regulation and policy.

Check out related coverage and perspectives on the EO with other outlets, to include:

TechCrunch: White House issues its executive order on cryptocurrencies

CNN: Joe Biden orders study of cryptocurrency risks and a digital dollar

Forbes: Biden's Executive Order To Fuel A Bank-Bitcoin Boom: Americans Want Crypto From Their Banks

Catch up on our most recent publications from The Next Block.

Decentralized Finance (DeFi): a hybrid hypothesis

Decentralized Identity and the Reclamation of Your Privacy The Next Block’s 2021 Year in Review The Ultimate Resource for Becoming a TradFi and DeFi Expert

The Next Block's 2022 TradFi and DeFi Predictions

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