As cryptocurrencies rise and fall with volatility that oil prices could only dream of, regularly shifting double digits in either direction seemingly on a whim, the U.S. government will - finally - be taking a whole-of-government approach in order to understand what the technology has to offer, as well as the underlying risks that come with it and what a potential U.S. Central Bank Digital Currency could mean.
The crypto market’s reaction to President Biden’s executive order was one of hope, sending the flagship crypto Bitcoin up 11% and Ethereum up 8%, last Wednesday.
While the executive order doesn't specify much in terms of policy, the crypto market is considering it a win despite mention of the need to keep restrictions as it suggests that D.C. could be getting “more comfortable” with cryptos, according to Miller Tabak + Co-chief market strategist Matt Maley.
While regulation is often considered a negative, it can also provide legitimacy that could help calm some of the volatility encountered in the space.
According to Chainanalysis, a whopping $14.08 billion worth of cryptos was received by illicit addresses in 2021. Funds received through scams surged 82% and accounted for $7.8 billion of those funds (with $2.8 billion coming from rug pulls).
With numbers like this, it should be of no surprise to any crypto follower that the Wild West that exists today will face more regulation. The real surprise is that the vaguely worded executive order didn’t show disdain or negative sentiment towards the industry.
Anyways, let's talk about banks.
One of the potential outcomes from this is that it could help get banks into crypto. According to a Cornerstone Advisors report on the banking industry, over half of the Americans that hold cryptocurrency say they would use their bank to invest in cryptos if they could.
Top-level employees at banks continue to maintain a long list of reasons for avoiding crypto products. Cryptocurrencies hold immense regulatory risks, as every country will produce its own laws and regulations that influence demand for the globally accessible asset.
Additionally, the unknown is just too great with cryptos at the moment. Losing all of your money on a breakfast-themed DeFi site where you didn’t do an researchon a new coin is one thing, but losing all of your money to a crypto project that you bought directly from your bank is another. One hurts my pocket, the other tarnishes the reputation of a company that operates in an industry that is all about the security and safekeeping of your dollars.
This is part of the reason why just 1% of banks currently offer crypto services and is probably why just 1 in 10 are planning to offer those services at some point this year, despite a blockbuster 2021. So, with one-to-some of those concerns potentially being mitigated by forthcoming legislation, there just might be a boom in cryptos at banks.
Depending on how the whole-of-government investigation on cryptos pans out, the most impactful directive could result in the creation of a Digital Dollar.
There are a lot of uncertainties about what that would look like. Obviously, it would be worth the same amount as a physical dollar, but it's unclear if this would use blockchain technology or, perhaps, a newer technology that doesn’t need stakers/miners or fees, such as a DAG.
If the US chose a more traditional blockchain for its distributed ledger, it would have to be much more scalable than current blockchains.
As your Digital Dollar wallet becomes your defacto bank, private transaction fees (like debit cards and such), will no longer be needed.
If I don’t need a bank to hold my money for security purposes or for completing a transaction at the register, the outlook of banking completely changes. While buying cryptos through your bank is wanted right now, people would (likely) pretty instantly trust that the government-backed crypto is legit and might prefer, at this point, to keep the bank out of it. Maybe you’d store your security code in a safe-deposit box, but otherwise, you don’t really need a bank until you need a loan.
While we currently provide liquidity to banks so that they can make loans in return for protecting our cash, we’d become way stingier about providing that liquidity with a Digital Dollar. This could force banks more into a middleman role, collecting fees or a percentage of the loan for conducting background checks and screenings applicants. Essentially, more about facilitating me loaning my money out, rather than maintaining the role as the loaner.
Banks aside, while cryptos have been rallying more on that first section in hopes that clearer regulation leads to wider acceptance, many cryptos may come to rue this second section. This particularly goes for the numerous cryptos that simply aim to be “digital money”. If the US-backed crypto came to be, it would instantly be the preferred crypto to spend and the most widely accepted.
Thus, coins that wanted to simply be a digital currency and don’t have another use-case, like being a decentralized data provider, creating “digital twins” and offering data integrity, or 5G internet provider.