Biden Administration gets serious about Web3
As the third generation of the internet – Web3 – has continued to expand, many developers, companies, and investors have agonized over the lack of regulatory clarity around the world, particularly in the United States. But now that US President Joe Biden has issued an Executive Order on Ensuring Responsible Development of Digital Assets, a sleeping giant has awoken.
The US must lead in this critical sphere. Owing to the climate of opacity in recent years, a significant share of crypto and Web3 companies have established legal domiciles in smaller jurisdictions. Some of these, such as Bermuda and Singapore, have established prudent whole-of-government approaches for regulating digital assets and fintech; but others are regulatory havens that have more or less given start-ups carte blanche.
In its new executive order, the Biden administration recognizes that “advances in digital and distributed ledger technology for financial services have led to dramatic growth in markets for digital assets, with profound implications for the protection of consumers, investors, and businesses.” He has directed all relevant federal agencies to study the risks and opportunities associated with blockchain technology. And by including agencies such as the Department of Commerce, the Department of Labor, and the US international development agency, USAID, he acknowledges that Web3 offers opportunities well beyond digital-asset speculation, new forms of software-intermediated capital markets, or decentralized finance.
Moreover, by acting now, the administration can avert a potential “crypto constitutional crisis,” stemming from contradictory regulatory guidance across the US states. Owing to the fluid and global nature of digital assets and money, oversight in this domain cannot be devolved to the states in the way that many other financial-services regulations are. Though US states are not only laboratories for democracy but also fintech labs, they are not represented in global financial bodies such as the Financial Stability Board (FSB), the Bank for International Settlements, or the Financial Action Task Force.
The Web3 and crypto sectors have become too big to ignore. Within days of Russia’s invasion of Ukraine, the Ukrainian government had raised more than $60 million “through 120,000 crypto-asset donations” from around the world. Globally, the value of the cryptocurrency industry has already reached $3 trillion (though this market capitalization can vary widely, owing to certain crypto assets’ hypervolatility). This rapid growth has duly raised macroprudential concerns, leading to a wave of studies assessing these assets’ potential systemic risks.
The FSB, for example, recently published a comprehensive report identifying potential vulnerabilities in crypto markets, and raising a number of public policy concerns across the three key segments of “unbacked crypto assets (such as Bitcoin); stablecoins; and decentralized finance (DeFi) and other platforms on which crypto assets trade.” The FSB is worried that the market not only is becoming too big to fail, but that it is also too amorphous to regulate effectively.
Another important contribution to the debate comes from the President’s Working Group on Financial Markets, which recently issued a report on stablecoins – digital tokens backed by fiat currencies and safe, liquid assets. In presenting the report, US Secretary of the Treasury Janet Yellen notes that while stablecoins “have the potential to support beneficial payment options,” the current approach to “oversight is inconsistent and fragmented, with some stablecoins effectively falling outside the regulatory perimeter.”
As I have argued previously, with regulatory clarity, the adoption of dollar-backed stablecoins – like the one issued by my own organization – will ultimately help to sustain the greenback’s global supremacy. It will also help the US and others catch up to China in the digital-payments race. The old analog system of money and payments is sclerotic; vulnerable to cyber breaches, fraud, and illicit finance; opaque (in that financial transactions are untransparent); and costly. It leaves tens of millions of people unbanked and excluded from the financial system.
In the twenty-first century, there is no good reason why migrants should have to pay 5-7% fees to send remittances to their families back home. Just as we do not think of email as a “cross-border” exchange, the hope is that we eventually will no longer think of payments that way, either. That is the promise offered by an open financial system based on public blockchain ledgers and trusted forms of digital money.
Biden’s executive order signals that the US intends to be a leading source of both innovation and standard setting in this new technological domain. Like the first two generations of the internet, this one will be heavily shaped by regulatory first movers. The US still has a chance to ensure that Web3 will evolve in directions that reflect Western values of openness, opportunity, and inclusion. But it must not drag its feet. The global digital currency race will continue to intensify. China’s digital-currency (e-CNY) pilot project has already been expanded to more than 260 million users after making its debut at the Beijing Winter Olympics.
The fight over digital currencies will be one of the defining contests of our time. The US can no longer be a passive observer to the latest technological revolution. This month’s executive order is a welcome first step. The challenge now will be to strike the right balance between managing risks and supporting America’s global competitiveness.
Dante Alighieri Disparte, Chief Strategy Officer and Head of Global Policy at Circle, is a member of the Council on Foreign Relations and serves on the World Economic Forum’s Digital Currency Governance Consortium.
© Project Syndicate, 2022. www.project-syndicate.org