The Competing Priorities Facing U.S. Crypto Regulations

By: Josephine Wolff (Brookings Institution)

As the Biden administration has worked in recent months to develop cryptocurrency regulations, the U.S. government finds itself caught between two extremes: unwilling to actively block cryptocurrency transactions for fear of restricting a growing and potentially lucrative industry but also determined not to give up completely on policing illegal cryptocurrency payments and going after their role in the cybercrime ecosystem.

In a recent executive order and subsequent strategy documents, President Biden has pledged to both support development of cryptocurrencies and to restrict their illegal uses, two goals that the United States has long struggled to reconcile when it comes to digital money. And the Biden administration made clear in their executive order just how much the U.S. government wants to have it both ways, touting the potential benefits of virtual currencies for “responsible financial innovation” as well as the risks they pose to consumers, investors, and the “financial stability and financial system integrity.”

The executive order extended to all digital assets—not just cryptocurrencies—including other property that exists only in a digital form, such as non-fungible tokens. But of all forms of digital assets, cryptocurrencies are the kind that present the biggest security risks, as well as the greatest potential economic benefits.

In the past year, the balance struck by the U.S. government between encouraging entrepreneurial cryptocurrency ventures and discouraging criminal activities leveraging cryptocurrencies seems to have shifted somewhat, due both to the volatility of the virtual currencies themselves as well as the growing concerns about the types of crimes enabled by those currencies.

In particular, the United States seems increasingly interested in developing domestic cryptocurrency policies that can have a global impact on overseas criminal enterprises, including sanctioning cryptocurrency exchanges and individual cryptocurrency wallets, as well as recovering cryptocurrency payments made to criminals.

While these are restrictions on the behavior of U.S. individuals and companies, they are ultimately aimed at overseas criminal operations and making it more difficult for those foreign actors to profit from international cybercrime. It is too soon to say whether these recent measures will be effective or enforceable or whether they can be scaled up to address the full extent of the challenges posed by cryptocurrencies.

But it is clear that they mark a significant step forward in the history of U.S. cryptocurrency regulation in terms of how aggressive the government is willing to be about going after criminal virtual currency enterprises and also how willing it is to enter the virtual currency space itself with a potential central bank digital currency (CBDC)…

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