The failure of the United States to embrace cryptocurrencies fully and regulate them sensibly would seriously affect the U.S. dollar as the world’s reserve currency and the country’s economic standing in the world, according to a report released today by the Blockchain Research Institute in collaboration with the Washington D.C.-based Chamber of Digital Commerce.
The 122-page report titled “New Report for Government in the Second Era of the Digital Age”— co-authored by Blockchain Research Institute (BRI) co-founder Don Tapscott, Centre for Digital Entrepreneurship and Economic Performance co-founder Anthony Williams and BRI editor-in-chief Kirsten Sandberg — calls for “fresh thinking” by the U.S. government with the advent of artificial intelligence, the internet of things, and blockchain technologies.
The report, which will be sent to the Biden administration, also recommends utilizing blockchain for cybersecurity and privacy, digitally transforming public service, boosting funding to nurture innovation, and reforming immigration policies to attract and retain talent in the country.
“Every time there is a change of administration, there is a unique opportunity to change the course of action with respect to how the US government conducts its business,” said Tony Scott, the former U.S. chief information officer who oversaw federal technology spending and policy for the Obama administration, in the report’s foreword.
Covid-19, the rise of bitcoin, the creation of Facebook-backed Diem and China’s imminent launch of a central bank digital currency, among other factors, have all increased the urgency of reforms and the need to make fundamental changes to the U.S. monetary system, according to the report.
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Embracing the digital dollar
The report’s authors urge U.S. lawmakers to move swiftly to make America the first country to fully adopt a central bank digital currency — the digital dollar. Maintaining the U.S. dollar’s dominance and the values carried with it should be a national priority given China’s push to be the first major economy with its own digital currency. China’s ambitious DCEP (Digital Currency, Electronic Payment) project, once it is launched, is expected to increase the use of the yuan for trade settlement by China’s trading partners and erode the power of the U.S. dollar internationally.
The digital currency research institute and clearing center of China’s central bank has recently set up a joint venture with SWIFT, the global provider of secure financial messaging services — a sign that China is exploring global uses for its digital yuan. According to the Digital Dollar Project’s “Exploring a US CBDC” white paper, for the U.S. dollar to remain the world’s primary reserve currency, it cannot remain an analog instrument and must itself become a digital tokenized currency that measures, supports and transacts with the world’s digital tokenized things of value.
U.S. must bring values of democracy and privacy into the #DigitalDollar to win the accelerating #CBDC race, says @giancarloMKTS.— Forkast News (@Forkast_News) May 30, 2020
Check out the full exclusive interview:#CFTC #cryptodad pic.twitter.com/rc6ZMZFVqy
Embracing other cryptocurrencies, cautiously
Aside from the digital dollar, corporate cryptocurrencies like Facebook-led Diem and “community-based” currencies like bitcoin also have roles to play in the financial system, the report says, and the U.S. government should cautiously support them.
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The report sought to rebut a common view — also expressed recently by Treasury Secretary Janet Yellen during her confirmation hearing — that cryptocurrencies are often used for criminal or other illicit activity.
Criminal activity accounted for only 0.34%, or US$10 billion of all cryptocurrency transaction volume in 2020, according to Chainalysis, a crypto data company. In contrast, a higher proportion of fiat currencies — between 2% and 5% of global GDP (US$1.6 to US$4 trillion) annually — is involved in money laundering and other illicit activity, according to the United Nations.
Furthermore, the report notes that distributed ledger technologies — which enable the tracking and tracing of transactions — can actually facilitate efforts by law enforcement and financial regulators to deter money laundering and improve compliance with sanctions.
Yellen subsequently acknowledged the potential benefits of digital assets in her written testimony to the Senate, saying: “I think it important we consider the benefits of cryptocurrencies and other digital assets, and the potential they have to improve the efficiency of the financial system.”
“If confirmed, I intend to work closely with the Federal Reserve Board and the other federal banking and securities regulators on how to implement an effective regulatory framework for these and other fintech innovations,” Yellen wrote.
Streamlining multifaceted industry oversight
The disjointed regulatory compliance environment in the U.S. — with financial services regulation highly specialized and spread across different regulatory bodies, including the Financial Crimes Enforcement Network (FinCEN), the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) — was also flagged as another area needing rethinking.
Within the Treasury Department, the Office of the Comptroller of the Currency (OCC) has taken steps to allow national banks to participate in independent node verification networks and to use stablecoins for payment activities. FinCEN and state banking regulators have treated certain digital assets as currency. The CFTC has determined that “bitcoin and other virtual currencies” are a type of commodity. And the Internal Revenue Service (IRS) treats convertible virtual currencies as property for U.S. tax purposes. But the report highlights that the SEC has not, to date, formally determined that virtual currencies are not securities.
SEC Commissioner Hester Peirce told Forkast.News in an earlier interview that “each agency has to look at its rulebook and align the things that it sees with its rulebook. And so, for us at the SEC, the question that we get asked most often is, ‘Is this particular digital asset a security or not?’”
“So something might be characterized as one thing by another agency, yet still be a security under our rules, and that can be frustrating for people,” she said.
See related article: SEC commissioner Hester Peirce says enforcement is never good way to provide clarity
Calls for greater regulatory consistency and clarity have come from many in the industry, including San Francisco-based payments technology company Ripple, which is currently facing an SEC lawsuit for allegedly selling XRP in an unregistered securities offering.
“As we have said for many years, we’re simply asking for the rules to be clearly stated and applied consistently,” Ripple stated in an email to Forkast.News. “To date, they have offered no guidance for that determination, hindering responsible players like Ripple from being able to innovate in the U.S. to bring faster, cheaper and more transparent global payments to consumers who need them the most.”
See related article: XRP prices see ‘pump and dump’ as Ripple outlines legal defense strategy
The report’s authors have recommended that regulators apply common requirements to financial institutions engaging in virtual currency-related activities, including complying with sanctions.
Calling the U.S. regulatory environment a “mixed bag of laws,” the report suggests “a moratorium on new rules, a full consultation with stakeholders, and a principles-based rather than rules-based approach to regulation.” Providing clear guidance on digital tokens, including custody and tax treatment, the report adds, would also foster innovation in the country.
“Ultimately, the U.S. government must publicly recognize the economic and international significance of blockchain and establish a framework for boosting and promoting its development,” the authors wrote. “Without this, the nation will fall behind other countries whose leaders are seizing this singular opportunity to pioneer what could become international regulations and standards in this technology.”
Clarification: Feb. 17
An earlier version of this story referred to “Facebook’s Diem” and “Facebook’s stablecoin project.” The Diem Association reached out to Forkast.News to clarify that while the idea for Diem (formerly named Libra) was proposed and led by Facebook, Diem is now a project overseen by the independent Diem Association, which is backed by Facebook. We have updated the story accordingly.