Biden delivers verdict on the cryptocurrency industry

The "Economic Report" is an annual policy document from the U.S. President's Administration that aims to outline the White House's stance on the country's economic challenges. This year's report includes a section titled "Digital Assets: Relearning Economic Principles," which paints a bleak picture of the crypto industry. Upon closer examination, it appears that regulatory scrutiny on the cryptocurrency sector by U.S. regulators is expected to increase in the coming months.

The White House's report kicked off with a compelling historical overview. Economists pointed out that similar to the current cryptocurrency market, previous financial crises in the U.S. were often sparked by players who resembled the characteristics of today's cryptocurrency market participants. 

For instance, the banking panic of 1907 was triggered by reckless financial policies of non-systemic trust companies. When depositors started withdrawing their money from trusts and then from banks en masse, it took the intervention of J.P. Morgan, the founder of JPMorgan Chase and Morgan Stanley, to stabilize some of the sinking banks. Morgan invested significant funds to strengthen struggling banks and convinced other bankers to do the same. However, the financial speculators were not interested in rescuing the entire banking system. 

Past policymakers realized that during times of crisis, it is not enough to rely solely on individuals, but rather on robust institutions that can safeguard the interests of society. This led to the creation of the Federal Reserve System, which has been tasked with managing the monetary and credit policies of the United States ever since.

“Fast forward 100 years, and digital asset proponents are now aspiring to create a decentralized financial system without relying on governments and their regulatory frameworks, which were shaped by important lessons

learned from multiple previous crises, including the 1907 panic,” draw analogies in the White House.

The White House report makes it clear that despite the touted market advantages of cryptocurrencies such as decentralized storage and increased financial access, they do not actually possess these properties. 

 

The report further explains that cryptocurrencies are, in fact, speculative investment instruments. To support this claim, the authors of the report present the volatility trends of various assets over the past 5 years as evidence.

Cryptocurrencies are highly volatile, and one of the reasons behind this volatility is the lack of fundamental value compared to traditional assets like stocks, gold, or silver.

Analysts also point out that information about the absence of fundamental value in cryptocurrencies is often hidden from retail investors. This is due to prevalent fraud and non-compliance with regulatory requirements in the industry. 

At the same time, the report's authors acknowledge the substantial surge in trading volumes within the cryptocurrency industry in recent years. For example, the top 10 cryptocurrency platforms now trade around $91 billion daily (as of January 18, 2023). 

The analysts also couldn't resist mentioning Binance, a cryptocurrency exchange, and its reluctance to provide accurate and reliable information in response to regulatory inquiries. 

The Biden Administration considers the market successes of cryptocurrency exchanges as risks, although experts have not yet formed a unanimous opinion on the nature of these risks. 

In the final section of the report, the authors make a predictable forecast of a looming decline in the crypto sector since cryptocurrencies:

As a solution, they propose the introduction of CBDCs and the implementation of FedNow, the Federal Reserve's upcoming payment system set to launch in the summer of 2023.

However, it's too soon to jump to conclusions that cryptocurrencies will be banned in the US after this critical report. On a brighter note, the White House reluctantly acknowledges that some cryptocurrencies appear to be here to stay and will continue to pose risks to financial markets, investors, and consumers. They assure that regulatory agencies will enhance their capabilities and ultimately ensure compliance with all government regulations.