The Old and the New: President Biden’s Regulatory Stance on Cryptocurrency

On March 9th, 2022, President Biden issued an executive order entitled “Ensuring Responsible Development of Digital Assets.” This executive order marks a turning point in the Biden Administration’s response towards cryptocurrency and other digital assets such as NFTs (non-fungible tokens). The order essentially clarifies the future of cryptocurrency regulation in the United States; however, President Biden achieves this goal without laying out any specific policy decisions. Instead, Biden attempts to align the government’s approach to regulating cryptocurrency with a specific interest in consumer protection.

Biden’s executive order is particularly important because it officially articulates the impact of digital assets on the global economy. This order demonstrates how the government must come to terms with the rise of digital assets and how regulation may be necessary to protect consumers and seize the economic benefits. 

The Biden Administration’s main fear surrounding cryptocurrency is its potential use for illicit activities. This fear permeates the current political reality of the United States as the government worries about Russia using cryptocurrency for sanctions-busting and other countries developing their own cryptocurrencies. President Biden maintains that better regulation surrounding cryptocurrency could channel the various benefits of cryptocurrency while simultaneously mitigating these security risks. 

Through this executive order, President Biden ensures that all federal agencies are on the same page in terms of the regulatory status of digital assets. The independent federal agencies need a unified stance on cryptocurrency, as the current legislative patchwork around cryptocurrency allows for serious issues concerning consumer protection. For example, the SEC has prosecuted fraudulent providers of digital assets over the past decade. They prosecute these providers through initial coin offerings (ICOs: like IPOs, but for cryptocurrencies) as well as other assets. The SEC has focused their regulation of cryptocurrency through the lens of protecting investors against fraud; they attempt to protect them by prosecuting cryptocurrencies that act as securities instead of decentralized currency. However, the test they use to determine an investment contract is incredibly outdated and in need of an update.

The Securities Act of 1933 had no formal definition of an investment contract prior to 1946. In SEC v. Howey, the Supreme Court established that an investment contract is “a contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.” This definition encompasses all current securities investments outside of digital assets. The second part of the definition is that “it [is] immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise.” This second part is what the SEC currently uses with respect to digital assets, as it encompasses ownership of digital assets through the “nominal interests” terminology. However, it does not capture the full breadth of digital assets as they exist in the 21st century. The SEC has used this definition to prosecute digital assets that act as securities, meaning that investors put money into the assets with no intent of exchanging it as a currency. This process has led to industry leaders urging the government for clearer guidelines around digital assets while still hoping that they maintain a relatively blank slate of restrictions. Using a test devised in the mid-1900s to regulate cryptocurrency may seem unwise, especially given the fact that the internet did not yet exist at the time of the case. 

The SEC is not the only independent agency with its eyes set on crypto regulation; the Department of Justice also has created a taskforce to investigate and prosecute misuses of digital assets: the National Cryptocurrency Enforcement Team. This team has the responsibility of tracking down cryptocurrency that has been used for illicit purposes. A large target of this team is catching money laundering operations that succeed through the use and rapid exchange of digital assets. The Biden Administration also has another tool to regulate cryptocurrency in the Commodity Futures Trading Commission. This commission has been incredibly active over the past 5 years, even working with the DOJ to bring dual cases against the weak anti-money laundering precautions of BitMEX, a crypto derivative exchange. 

With all of these regulatory tools in place, Biden issued this executive order to establish his administration’s position on digital assets as well as how he wants these agencies to cooperate in the future. 

Besides the regulation of cryptocurrency, his order also lays out the basis for a “digital dollar.” This project would revolve around a U.S. Central Bank Digital Currency (CBDC), basically making money available from a central bank directly to a user’s wallet without the use of an intermediary bank. The ease of access to money as well as the ease of transfer could have potential benefits for future Americans with the implementation of a CBDC. However, there are difficulties with this project as well. Digital wallets would freeze out an older, largely rural demographic from an easier system of banking; the tech barrier for poor and rural people also could cause potential issues for a CBDC. Biden has not committed to a particular stance on this project, but in his executive order he made looking into the viability of this system a major priority. With countries such as China soft-launching their own cryptocurrencies, President Biden sees exploration into this project as crucial in keeping up with global technological powers. 

As the Biden Administration looks into the feasibility of regulating digital assets through cooperative independent agencies, their first priority remains making sure these assets do not harm consumers. Because this relatively new technology has much more capacity to confuse and fraud investors than traditional banking, this executive order echoes the sentiment that the government should approach digital assets with the utmost caution. Beyond consumer protection, this change is indicative of a larger cultural shift away from traditional access to money, apparent in Biden’s curiosity about a CBDC. Despite slight harm to some current exchanges due to the lack of cohesiveness in regulation, this and future clarifications about investment contracts ultimately will improve the safety of cryptocurrency. 

Andreas Rivera Young is a Sophomore at Brown University, concentrating in Political Science and History. He is a staff writer for the Brown Undergraduate Law Review and can be contacted at andreas_rivera_young@brown.edu.