By David Potter
Cryptocurrencies were once thought of as the wild west of digital transactions. At crypto’s birth, there was little to no oversight or regulation. It was only a matter of time before governments worldwide would start reacting to this new technology — and regulating it.
For the U.S., that happened on March 9 when President Joe Biden signed an executive order, “Ensuring Responsible Development of Digital Assets,” a far-reaching executive order pertaining to cryptocurrency described as a “whole-of-government approach to addressing the risks and harnessing the potential benefits of digital assets and their underlying technology”. The order directs several agencies to provide written policy assessment and recommendations to the President within 120 or 180 days, depending on the agency. The six main priorities of the order are: “consumer and investor protection; financial stability; illicit finance; U.S. leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation.”
The Department of Treasury will be responsible for developing recommendations to respond to the effects of the surging popularity of cryptocurrencies. Five years ago, the total market cap for all cryptocurrencies was $23 billion. Today, the market has grown to $1.7 trillion. The Biden administration cited this growth as reason to be concerned about protecting consumers, investors, and businesses. Additionally, the Financial Stability Oversight Council will be responsible for identifying and mitigating any economy-wide financial risks associated with cryptocurrencies and digital assets in general.
Some of the areas of the order that appear salient to the average holder of digital assets are privacy, digital asset mining and how it relates to climate change, and the potential creation of a U.S. Central Bank Digital Currency (CBDC).
Cryptocurrencies (digital assets) have long been thought of as champions of privacy. Earlier adapters of crypto thought that blockchain technology made it impossible for their transactions to be tracked. Some took this perception of privacy as greenlight for illicit activity. As law enforcement agencies and the private sector have had time to react to blockchain technology and crypto, the element of privacy appears to be disappearing.
In 2011, a man named Ross Ulbricht founded what would become “darknet” market, or an online black market, for illegal drugs called “Silk Road” that had more than $1 billion in transactions. He was ultimately sentenced to life in prison and the federal government seized over $1 billion in Bitcoin connected to the Silk Road in November 2020.
Similarly, federal agents led by IRS Criminal Investigations seized $3.6 billion in Bitcoin that a couple stole from the cryptocurrency exchange Bitfinex in 2016. Bitcoin is one of the most easily traced digital assets, but even privacy coins (self-proclaimed anonymous cryptocurrencies) have been traced.
Monero, the leading privacy coin, is now reportedly traceable. A California Crypto compliance firm called Ciphertrace has claimed that they have developed tracing tools specifically for Monero and are selling those tools to the federal government.
Privacy coins may also be impractical for evading sanctions because they’re being delisted from an increasing number of public crypto exchanges. Regarding privacy as it pertains to national security and illicit activities — that is, activities that would be governed under the Patriot Act — any restrictive policy changes brought forth by the executive order may be redundant as private, digital asset transactions no longer exists — at least not for the federal government, which in the above examples already has proven it can trace crypto transactions.
Climate impacts of crypto transactions and crypto mining have been defined by their energy consumption. Sending or receiving one Bitcoin requires 2,292 kWh of electrical energy. That’s enough energy to power the average U.S. household for 78 days. Comparatively, a 100kWh battery in a Tesla costs about $15.29 to fully charge and provides a range of 412 miles.
Bitcoin was designed to have this enormous energy requirement to keep it decentralized. The idea was to not let one user gather too much coin too quickly. Other coins, such as Dogecoin, require a lot less energy than Bitcoin. One Dogecoin can be mined and transacted for less than $0.10.
After witnessing the increased popularity and relevance of digital assets over the past decade, members of the mining community have taken it upon themselves to develop new mining protocols that are significantly cheaper while still preserving decentralization. Other groups seek to promote mining exclusively using renewal energy.
If the federal government caps energy usage for digital asset mining, a possibility that arises from the executive order, prior to energy-saving technologies being fully developed and utilized, it could effectively illegalize mining overnight and kill much of the industry. On the other hand, some powerful figures in crypto see regulation by the government as a stamp of legitimacy and don’t feel threatened. For example, Faryar Shirzad, the chief policy officer of the largest U.S. crypto exchange, Coinbase, said, “We applaud the White House for recognizing this as a defining moment for U.S. innovation on the world stage.”
So far, the regulations contemplated by the order appear aimed at protecting the worldwide status of the U.S. dollar as the world’s reserve currency, and also the potential advent of a United States Central Bank Digital Coin, stating, “Sovereign money is at the core of a well-functioning financial system, macroeconomic stabilization policies, and economic growth. My Administration places the highest urgency on research and development efforts into the potential design and deployment options of a United States CBDC.”
Whatever policy recommendations emerge within 6 months from now, from these agencies, we can be certain that they will be designed for the government to exert even more control over a cryptocurrencies that were once managed solely by private citizens and prioritized their own interests. No longer.
David Potter is a contributing editor at Americans for Limited Government.
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