Regulatory Moves Show Crypto is Here to Stay

While price action volatility in crypto markets continues due to geopolitical, inflationary and other factors, regulators in both the US and EU have made headway in recent weeks in shaping the two regions’ respective regulatory frameworks.

On 9 March, the White House published an Executive Order titled “Ensuring responsible development of digital assets”. The Executive Order issued by President Biden contains statements concerning the ongoing regulation of digital assets markets, including the following key areas:

1. Overall policy direction to:
   1. Reduce the risks that digital assets could pose to consumers, investors, and business protections.
   2. Ensure financial stability and financial system integrity.
   3. Combat and prevent crime and illicit finance.
   4. Maintain national security.
   5. Ensure the ability to exercise human rights.
   6. Deliver financial inclusion and equity.
   7. Manage climate change and pollution.
2. Key policy objectives to:
   1. Protect consumers, investors, and businesses.
   2. Protect United States and global financial stability and mitigate systemic risk.
   3. Mitigate the illicit finance and national security risks posed by misuse of digital assets.
   4. Reinforce United States leadership including through the responsible development of payment innovations and digital assets.
   5. Promote access to safe and affordable financial services.
   6. Support technological advances that promote responsible development and use of digital assets.
3. Coordination:
   1. To be managed by the Assistant to the President for National Security Affairs (APNSA) and the Assistant to the President for Economic Policy (APEP) as a comprehensive governmental inter-agency process.
4. Central Bank Digital Currencies:
   1. Conduct (with the highest urgency) research and development efforts into the potential design and deployment options of a United States CBDC.
5. Measures to protect consumers, investors, and businesses.
   1. Ensure that digital assets do not pose undue risks to consumers, investors, or businesses.
   2. Put in place protections as a part of efforts to expand access to safe and affordable financial services.
6. Actions to promote financial stability, mitigate systemic Risk, and strengthen market integrity.
7. Actions related to fostering international cooperation and United States competitiveness.

The Executive Order is wide ranging and it will take time for specific and concrete outcomes to emerge. But it is a clear statement of intent from the US President that crypto and digital assets are here to stay, and that the USA aims to be a global leader.

It is very likely that greater regulatory clarity for institutions, corporates and professional investors will act as a positive driver for increased investment in the overall space within the US. This is also likely to spur other governments and regulators to follow suit, adding momentum to further investment in crypto and digital products and services.

In parallel with the US Presidential announcement, the EU’s Economic and Monetary Affairs Committee failed to pass a draft of the Markets in Crypto-assets (MiCA) legislation which included a clause pledging to make crypto assets traded or issued within the bloc “subject to minimum environmental sustainability standards”.

This legislation was seen by some as a way of regulating or even banning “proof-of-work” blockchains such as Bitcoin and Ethereum due to their energy intensive nature. (NB. Ethereum plans to move from a proof-of-work to a “proof-of-stake” security mechanism, which is much less energy intensive).

Instead, the Committee passed a separate proposal to add cryptocurrency mining to the EU’s taxonomy for sustainable finance, which would define whether crypto can be viewed as a sustainable investment.

This was seen as a win by Bitcoin enthusiasts. Michael Saylor, the CEO of software developer MicroStrategy who has become Wall Street’s flagbearer for adopting Bitcoin as a corporate treasury reserve asset said: “Bitcoin won that vote. You need energy to create real property”.

While the Bitcoin energy debate continues to rage in some quarters, the industry has evolved significantly over the last 12 months, with Bitcoin mining having largely migrated out of China where coal-fired electricity was used to power a meaningful amount of the network’s “hash power”.

Organisations such as the Bitcoin Mining Council (BMC) aim to “promote transparency, share best practices, and educate the public on the benefits of Bitcoin and Bitcoin mining”.

In its Q4-21 survey, the BMC stated: “This quarter we saw the trend continue with dramatic improvements to Bitcoin mining energy efficiency & sustainability due to advances in semiconductor technology, the rapid expansion of North American mining, the China Exodus, and worldwide rotation toward sustainable energy & modern mining techniques”.

While the energy debate about Bitcoin and proof-of-work blockchains won’t dissipate anytime soon, ongoing work by regulators and legislators continues to move slowly but surely, providing greater clarity for market participants and likely to support ever-increasing investment into the space.