Daniel Pereira
We continue with our survey of crypto and digital currency initiatives from around the globe, all of which are officially sanctioned to enhance national competitive advantage (in the event crypto overtakes the US dollar as the global reserve currency). It is the cumulative adoption rate of state-sanctioned crypto and digital currency legalization and regulation that will propel this innovative system for value exchange as a global currency standard.
In previous posts, we provided an analysis of crypto and digital currency initiatives in Pakistan, Vietnam, Colombia, China, El Salvador, Panama, Ukraine, India, Argentina, and Russia.
We now return to the U.S. to evaluate crypto and digital asset initiatives announced via executive order in March of this year.
On March 5th, we provided an analysis of the major central bank digital currency (CBDC) initiative in the U.S., Project Hamilton, which is a technical collaboration between the Federal Reserve Bank of Boston and The MIT Digital Currency Initiative. As OODA CEO Matt Devost also noted in his March 2022 post, Is Bitcoin a National Security Risk?, “the Biden Administration is set to release an Execute Order (EO) articulating national security concerns associated with Bitcoin and other cryptocurrencies.”
Project Hamilton was a major applied basic research project that informed some of the actionable and directional components of the EO when released on March 9th. The Executive Order on Ensuring Responsible Development of Digital Assets provides details of the “first Whole-of-Government Strategy to Protect Consumers, Financial Stability, National Security, and Address Climate Risks – and called for measures to:Protect U.S. Consumers, Investors, and Businesses by directing the Department of the Treasury and other agency partners to assess and develop policy recommendations to address the implications of the growing digital asset sector and changes in financial markets for consumers, investors, businesses, and equitable economic growth. The Order also encourages regulators to ensure sufficient oversight and safeguard against any systemic financial risks posed by digital assets.
Protect U.S. and Global Financial Stability and Mitigate Systemic Risk by encouraging the Financial Stability Oversight Council to identify and mitigate economy-wide (i.e., systemic) financial risks posed by digital assets and to develop appropriate policy recommendations to address any regulatory gaps.
Mitigate the Illicit Finance and National Security Risks Posed by the Illicit Use of Digital Assets by directing an unprecedented focus of coordinated action across all relevant U.S. Government agencies to mitigate these risks. It also directs agencies to work with our allies and partners to ensure international frameworks, capabilities, and partnerships are aligned and responsive to risks.
Promote U.S. Leadership in Technology and Economic Competitiveness to Reinforce U.S. Leadership in the Global Financial System by directing the Department of Commerce to work across the U.S. Government in establishing a framework to drive U.S. competitiveness and leadership in, and leveraging of digital asset technologies. This framework will serve as a foundation for agencies and integrate this as a priority into their policy, research and development, and operational approaches to digital assets.
Promote Equitable Access to Safe and Affordable Financial Services by affirming the critical need for safe, affordable, and accessible financial services as a U.S. national interest that must inform our approach to digital asset innovation, including disparate impact risk. Such safe access is especially important for communities that have long had insufficient access to financial services. The Secretary of the Treasury, working with all relevant agencies, will produce a report on the future of money and payment systems, to include implications for economic growth, financial growth and inclusion, national security, and the extent to which technological innovation may influence that future.
Support Technological Advances and Ensure Responsible Development and Use of Digital Assets by directing the U.S. Government to take concrete steps to study and support technological advances in the responsible development, design, and implementation of digital asset systems while prioritizing privacy, security, combating illicit exploitation, and reducing negative climate impacts.
Explore a U.S. Central Bank Digital Currency (CBDC) by placing urgency on research and development of a potential United States CBDC, should issuance be deemed in the national interest. The Order directs the U.S. Government to assess the technological infrastructure and capacity needs for a potential U.S. CBDC in a manner that protects Americans’ interests. The Order also encourages the Federal Reserve to continue its research, development, and assessment efforts for a U.S. CBDC, including development of a plan for broader U.S. Government action in support of their work. This effort prioritizes U.S. participation in multi-country experimentation, and ensures U.S. leadership internationally to promote CBDC development that is consistent with U.S. priorities and democratic values.” (1)
Released on September 16th, the “First-Ever Comprehensive Framework for Responsible Development of Digital Assets” is described by the White House in the following manner:
“The digital assets market has grown significantly in recent years. Millions of people globally, including 16% of adult Americans, have purchased digital assets—which reached a market capitalization of $3 trillion globally last November. Digital assets present potential opportunities to reinforce U.S. leadership in the global financial system and remain at the technological frontier. But they also pose real risks as evidenced by recent events in crypto markets. The May crash of a so-called stablecoin and the subsequent wave of insolvencies wiped out over $600 billion of investor and consumer funds.
President Biden’s Executive Order (EO) on Ensuring the Responsible Development of Digital Assets outlined the first whole-of-government approach to addressing the risks and harnessing the potential benefits of digital assets and their underlying technology. Over the past six months, agencies across the government have worked together to develop frameworks and policy recommendations that advance the six key priorities identified in the EO: consumer and investor protection; promoting financial stability; countering illicit finance; U.S. leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation.
The nine reports submitted to the President to date, consistent with the EO’s deadlines, reflect the input and expertise of diverse stakeholders across government, industry, academia, and civil society. Together, they articulate a clear framework for responsible digital asset development and pave the way for further action at home and abroad. The reports call on agencies to promote innovation by kickstarting private-sector research and development and helping cutting-edge U.S. firms find footholds in global markets. At the same time, they call for measures to mitigate the downside risks, like increased enforcement of existing laws and the creation of commonsense efficiency standards for cryptocurrency mining. Recognizing the potential benefits and risks of a U.S. Central Bank Digital Currency (CBDC), the reports encourage the Federal Reserve to continue its ongoing CBDC research, experimentation, and evaluation and call for the creation of a Treasury-led interagency working group to support the Federal Reserve’s efforts.” (2)
What Next?
In the weeks ahead, we will track down the nine individual USG reports which make up the specifics of this ‘comprehensive framework’ as suggested by this most recent EO from September and provide an OODA Loop analysis.
Review other countries’ efforts we have covered as part of our Global Crypto and Digital Currency Initiatives series.
Will anonymity, the central design element of blockchain technologies, survive the regulatory climate globally? This question remains central to our current research. See: Will Know Your Customer (KYC) Verification Regulations Stifle Crypto Innovation? And the Future of Money?: While massive, global cyber theft and data breaches may capture the headlines, there are many other issues surrounding the future of cryptocurrency. Fraud and cybersecurity activity is necessary for creative destruction in the cryptocurrency marketplace. OODA CEO Matt Devost captured the current climate in the crypto market noting that: “We needed to wash all the fluff out of the system. And every week we are seeing some sort of mass destruction of a major player in that space.” Governmental regulation now looms large over the entire innovation ecosystem. Many governments – and the U.S. will follow the lead – will not allow the transfer of bitcoin or digital currencies unless the identity of the recipient wallet is known. This policy has come to be known as Know Your Customer (KVC) verification on anonymous crypto transactions and has the potential to break the anonymity-based model for much of the ecosystem.
The Future of the Internet and Artificial Intelligence: Non-fungible Tokens (NFTs) and AI-Generated Art: The current non-fungible tokens (NFTs) environment serves as a prelude to digitally tracked assets of the future. It is an early exploration of how property rights and ownership will work in digital economies and the metaverse with a layer of irrational enthusiasm, speculative gambling, and desire to be part of a community applied on top of the current iteration. There is something real here that has yet to be fully realized and a lot of abstraction distraction today. Some technologists have included NFTs (and generative art which makes use of machine learning and blockchain-native randomness to produce striking, unpredictable art) in their vision for a third age of the internet—the securitized internet.
And, of course, we continue to integrate the tactical insights, and strategic implications, including the follow-up research questions that emerged from OODAcon 2022 – The Future of Exponential Innovation & Disruption – and The Future of Money panel which explored the fact that ten years ago, resilient cryptocurrencies did not exist, yet today the infrastructure to create them is available to anyone. The blockchain is often described as having the potential to be more disruptive than the Internet itself and the rules of finance are being rewritten every day. The session took us through the good, bad, and ugly of cryptocurrency and blockchain and highlights issues that will drive the next five years of blockchain. Are we in a period of Creative Destruction and what will emerge in the future?
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