What to Expect from Biden's Executive Order on Crypto

What does the White House's roadmap on crypto mean for investors?

President Biden issued a much-anticipated executive order on cryptocurrency and digital assets today, setting out key priorities and a roadmap for coming months. Price-wise, the initial reaction to the order (which has been in the works for some time) was positive. Market leader Bitcoin (BTC) gained around 9%, and broke the $40,000 barrier again.

So what's in the report, and what can investors expect? Here are some of the key takeaways.

1. "Responsible" is the word of the day

One of the challenges in crypto regulation is getting the right balance between cracking down on the illegal or shady aspects of the industry without stifling innovation. Biden's order attempts to do just that. According to the White House, over 40 million Americans have invested in or traded cryptocurrencies.

The U.S. doesn't want to stop crypto trading. It wants to protect investors -- as well as the country's financial stability -- and play a leading role in the evolution of the cryptocurrency industry. The executive order addresses six priorities:

• Consumer and investor protection
• Financial stability
• Illicit finance
• U.S. leadership in the global financial system and economic competitiveness
• Financial inclusion
• Responsible innovation

The word "responsible" is used a number of times, and there's a clear desire to encourage the positive sides of crypto while reducing the risks of illicit activity. "The rise in digital assets creates an opportunity to reinforce American leadership in the global financial system and at the technological frontier, but also has substantial implications for consumer protection, financial stability, national security, and climate risk," says a White House statement.

2. Cryptocurrency exchanges may need to change

All in all, the phrase, "Same business, same risks, same rules" summarizes the attitude toward crypto exchanges and platforms. The White House recognizes that this is a unique industry with specific needs. But it still wants to see crypto platforms offer the same levels of protection, transparency, and security as other financial institutions.

The White House order raises several concerns about existing practices, including:

• The level of protection companies provide in custodial asset storage and protection of sensitive financial data. It suggests that existing measures may not be adequate, and points to billions of dollars in losses from security and market failures on crypto platforms.
• The rapid growth of crypto means platforms may not be subject to the right levels of regulatory supervision. It suggests this could present a risk to financial stability, and stresses the need for an appropriate regulatory approach.
• The potential use of digital assets for money laundering and cybercrime. The order suggests that without stronger supervision, crypto could fund activities such as terrorism and human trafficking.
• The potential to avoid anti-money laundering rules. Some platforms do not follow U.S. anti-money laundering rules, particularly certain peer-to-peer payment and decentralized finance applications.

Addressing these concerns may mean big changes in how some crypto platforms operate. There may also be increased controls over U.S. investors using crypto services based outside the country. Current platforms that don't require know-your-customer verification, particularly decentralized exchanges, may attract closer regulatory attention.

3. A digital dollar looks a lot more likely

The executive order dedicates a whole section to central bank digital currencies (CBDCs). Biden has placed the "highest urgency" on efforts to research and develop a United States CBDC. Biden would like the U.S. to take a leading role in CBDCs. The order highlights the potential for low-cost cross-border payments and increased financial inclusion -- both major benefits of CBDCs.

Unlike decentralized cryptocurrencies, a digital dollar would have a central authority. The idea is that it can offer the benefits of blockchain technology, such as low transaction fees, but without the volatility, since it would have the backing of the central bank. However, there are concerns about how the involvement of a central authority could affect privacy and even impact human rights.

4. Bitcoin's energy consumption is about to come under scrutiny

There are several references to the potential environmental damage cryptocurrencies could do, and the importance of reducing negative climate impacts and environmental pollution. Biden wants to see a full report on crypto's potential to "impede or advance efforts to tackle climate change at home and abroad." The White House is particularly concerned about any implications for energy policy and supply.

Bitcoin consumes as much energy each year as a medium-sized country, and its huge carbon footprint is a source of concern for environmentalists. Given that a number of mining operations moved to the U.S. after China's ban on cryptocurrency and mining, it's understandable the White House is keen to get a handle on the situation.

Bottom line

It's important to note that this is a roadmap toward regulation rather than a definitive set of rules or guidelines. Various agencies have between 90 days and a year to submit reports, analysis, and commentary. Nonetheless, today's order is a big step toward regulatory clarity, and the overall tone reflects an understanding of the complexities of regulating what has become a sprawling industry.

The initial response from the crypto industry was positive. Circle's CEO Jeremy Allaire described it as a "watershed moment for crypto" and Gemini's Cameron Winklevoss says it "paves the way for thoughtful national crypto regulation."

However, this is just the start -- Biden has called on various government agencies to engage with digital assets. Until we see how they respond and what measures they call for, it is difficult to know whether this will work out well for the crypto industry as a whole.

Emma Newbery owns Bitcoin. The Motley Fool owns shares of and recommends Bitcoin.