Roughly a century ago, Hermann Rorschach developed a psychological test that still bears his name. To assess his patients’ state of mind, he presented them with a series of ink blots and asked them to describe the image or emotion each design evoked.
Although his intentions were different than a Swiss psychoanalyst’s, Joe Biden set off a similar exercise in the financial world this week when he issued a long-awaited executive order on digital assets that somehow managed to elicit a positive response in the cryptocurrency community.
The US president’s pronouncement was short on policy detail. There were no new rules for cryptocurrencies or any additional requirements for the players and platforms in what has become a multitrillion-dollar trade featuring lots of leverage, heavy derivatives activity and passionate investors convinced they have found “the next big thing” of finance.
Biden’s marching orders were for his bureaucracy. To prepare the way for federal regulation, he called for an array of reports, assessments and consultations involving much of the executive branch of government and set deadlines for their completion ranging from 90 days to a year.
One might think that all this inside-the-Beltway rigmarole would put off crypto partisans known for their libertarian leanings. But like a Rorschach subject looking at an ink blot and imagining a butterfly, they liked what they saw. Among the more than 5,000 words of the executive order, there were several phrases that delighted the crypto community.
Among them was Biden’s commitment to “reinforce US leadership in the global financial system” through means including “the responsible development of payment innovations and digital assets”. They also were pleased that he saw the potential for a US central bank digital currency “to foster greater access to the financial system” and placed a great deal of emphasis on studying how such an innovation would work in practice.
This business-like tone of the executive order helped calm the nerves of a crypto community that has openly worried that the Biden administration did not like it — and might be tempted to crack down now to prevent Russia from using blockchains to avoid sanctions imposed after its invasion of Ukraine. Although it is risky to attribute daily crypto price moves to fundamental factors, it is worth noting that the leading digital currencies rallied strongly after the White House announcement on Wednesday.
“The executive order is a step forward,” said Christopher Giancarlo, who earned the nickname “CryptoDad” for his welcoming approach to digital currencies while serving as chair of the US Commodity Futures Trading Commission. “I commend the White House for a balanced, comprehensive, forward-leaning executive order on digital assets.”
The nature of the reports ordered up by the president suggests that his administration still harbours plenty of concerns about cryptocurrencies. Biden has asked officials to look at their implications for national security, financial stability, money laundering and other illicit activity, consumer protection, privacy and energy usage.
But Sarah Hammer, a former Treasury official who is managing director of the Stevens Center for Innovation in Finance at the University of Pennsylvania’s Wharton School, said the sheer rigour of the Biden executive order should be reassuring to digital-asset entrepreneurs.
“It mobilises resources to do the kind of research and study that are needed to effectively and more quickly implement regulation,” she said. “Calling the agencies to co-ordinate is crucial.”
How much time will pass before a formal US crypto policy takes shape is anyone’s guess. Biden, for example, has given officials 180 days to figure out whether new legislation would be needed should the US pursue a central bank digital currency. If a new law is required, Congress would have to get into the act and that would probably slow things down even more.
In the interim, the betting in the industry is that crypto companies will be subjected to regulation by enforcement. Gary Gensler, chair of the Securities and Exchange Commission, has been particularly vocal about this possibility, arguing, for example, that crypto trading and lending platforms that promise returns are wrong to think that they can avoid scrutiny under existing laws.
Gensler underscored his point last month when a New Jersey crypto company called BlockFi agreed to pay $100mn to the SEC and 32 US states to settle allegations it offered interest-bearing accounts — promising annual percentage yields well above those available on bank savings accounts — to investors without registering them as securities. BlockFi did not admit or deny the SEC’s allegations.
This kind of regulation can be significantly more painful than reading the prose of a presidential executive order. I’m no Rorschach, but perhaps it helps explain why Biden’s dry list of policy goals and research assignments found such an appreciative audience in the crypto community.
gary.silverman@ft.com
