At the end of January, we reported on President Biden’s updated cryptocurrency framework, so it’s time to take a deeper look into the proposed regulations to identify the problems and goals that are being addressed. 

The framework is separated into 6 sections that will help the United States create a financially stable environment that allows traders to invest into cryptocurrencies without extreme risk created by shady companies and fraudulent businesses. 

The framework also leaves room for a central bank digital currency (CBDC) which would have large implications for the United States economy if implemented. 

1. Protecting Consumers, Investors, and Businesses

The first step of the framework being developed is to address investor safety and make sure that businesses are following the correct compliance protocols that prevent (or lessen the impact of) major crashes. 

According to a study cited by the white house, sellers aggressively misled investors during 2021 with the rate of scams involving digital assets reaching 600% and 2022 only got worse with the crash of TerraLUNA and FTX. 

Guidelines created by the Biden administration would mitigate these issues through a series of steps beginning with the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) investigating and pursuing any instances of illegal activities involving digital assets. 

The Consumer Financial Protection Bureau (CFPB) and Federal Trade Commission (FTC) would also be responsible for monitoring consumer complaints more closely in order to uncover any malicious activity and enforce regulations as needed. 

2. Promoting Access to Safe, Affordable Financial Services

According to the white house, there are roughly 30 million Americans that do not have access to traditional financial services and are underbanked. Due to this situation, the Biden Administration is looking at cryptocurrencies and how they’re providing financial opportunities to the underbanked on a global scale. 

The administration is creating a new program called FedNow which is an interbank clearing system that will establish an infrastructure for instant payments across the country. The white house suggests that this new financial system could involve blockchain technologies but needs to be studied further. 

3. Fostering Financial Stability

The Biden administration has also put a large emphasis on the stability of cryptocurrency markets, specifically pointing their attention towards stablecoins and how they are used to provide financial services.

There is a big concern that stablecoins are not as stable as their name implies and the white house cites the TerraLUNA collapse as an example of this, saying that financial services cannot be appropriately provided through assets that are falsely labeled. 

To ensure that stablecoins can be reliable, the US Treasury will be responsible for working with financial institutions to locate and identify any financial or technical vulnerabilities by providing analytical tools and data sets. 

4. Advancing Responsible Innovation

Interestingly, the framework is also placing an emphasis on bolstering innovation in the digital asset space. The United States has been an economic leader for a long time and as such, sees no reason to overlook the growing web3 industry. 

To start, The Office of Science and Technology Policy (OSTP) and the National Science Foundation (NSF) are being asked to create a Digital Assets Research and Development Agenda that will help lead new developments on cryptography, cybersecurity, and privacy protection. 

The administration is also taking climate change into account, seeking to find new ways to innovate blockchain technology without harming the planet. To do so, the administration is asking the Department of Energy to track environmental impacts created by blockchain mining and to help develop new standards that reduce CO2 emissions. 

5. Reinforcing Our Global Financial Leadership and Competitiveness

Taking innovations and security one step further, the United States is also working with global policy makers to recommend the appropriate regulations necessary to help work alongside other nations that are developing their own digital asset ecosystems.  

In order to do so, US agencies will play a leading role at G7 and G20 summits when discussing matters related to cryptocurrencies and other forms of digital assets. The Department of Justice will also work with international enforcement bodies to prevent illegal activity. 

6. Fighting Illicit Finance

The United States takes a clear stance on groups that use cryptocurrencies for illegal activities such as money-laundering and terrorist financing. The Biden administration has made it clear that they are aware of illegal activity happening on-chain and are committed to eliminating them to prevent global harm. 

While many agencies such as the FBI are already committed to fighting crime happening with blockchain technology, the framework goes a step further by calling on the president himself to evaluate and amend the Bank Secrecy Act and how it applies specifically to digital asset providers.

Exploring a U.S. Central Bank Digital Currency (CBDC)

The United States views a CBDC as a unique way of bridging the gap between traditional and digital finance. The administration is curious to see how it could be best utilized and the benefits related to this regulatory framework that it would create. 

However, the white house expresses hesitancy about going down this path too quickly as there are many aspects of a CBDC that have not been studied enough. To learn more about the subject, the Biden administration has already created a list of policy objectives to identify the risks and benefits that a CBDC would create while also reflecting the priorities of the federal government. 

How will Biden’s regulatory framework impact web3?

Despite the common fears that regulations only hurt markets, the web3 industry is in dire need of cleaning up. The number of scams, fraud, crimes, and rug pulls that we observed in 2022 make cryptocurrencies look like an incredibly dangerous investment and for good reason - it was. 

Companies like FTX and Celsius were left unchecked and able to manipulate markets in ways that are highly illegal in the traditional market, causing ordinary investors to suffer. Regardless of how much regulations can slow down a market, value needs to be given time to grow again and weeding out more bad actors is still necessary. 

The framework isn’t the most ideal set of regulations for some who are seeking total financial privacy on-chain, but it’s necessary. Cryptocurrency needs a stark return to legitimacy and regulations that improve the stability of stablecoins and accountability of major web3 institutions could be a short-term solution to a growing industry that will need frequent policy updates.