White House flags risks cryptocurrencies pose to citizens and the financial system

Digital assets do not meet their claimed use-case scenarios and pose risks to investors and overall financial stability. This conclusion is contained in the President of the United States’ annual Economic Report to Congress.

The document prepared by the Council of Economic Advisers was released a year after the incumbent president Joe Biden issued an executive order coordinating federal agencies in regulating cryptocurrencies. For the first time since 1950, the report includes a section devoted to this asset class.

It states that cryptocurrencies were positioned as tools for disseminating intellectual property and financial value, a more efficient payment mechanism, a means of expanding access to financial services, and a way to remove financial intermediaries. To date, “digital assets have not delivered any of these benefits.”

“Cryptocurrencies […] do not present an effective alternative to fiat currency […] instead, their innovations are mainly aimed at creating artificial scarcity in order to support prices. Many of them do not have fundamental value. This raises questions about the role of regulation in protecting consumers, investors, and the rest of the financial system from the panic, crashes, and fraud associated with digital assets,” — the document says.

The report notes “ongoing investments in financial infrastructure that could benefit consumers and businesses.”

In 2023, a debut of the payment system from ФРС named FedNow, which does not use blockchain. Some advantages of this technology “may be realized in the future.” Specifically, the ФРБ New York is studying cross-border compatibility of wholesale CBDC in cross-border transactions, economists noted.

The launch of a national digital currency is not ruled out, but is questioned due to the risks of risks of liquidity associated with crypto firms.

The authors of the report are confident that claims that cryptocurrencies are an effective store of value and means of payment do not stand up to scrutiny.

“As money, the instrument must have stable value and limited price volatility,” the document explains.

Similar questions are raised with regard to stablecoins, whose holders may face a lack of “counterparties to exit positions.” Such assets are still “too risky” to serve as a means of payment.

The document also notes that industry participants do not comply with securities laws and that crypto-trading platforms concentrate various activities, which is prohibited in TradFi.

Skepticism extends to mining, which raises risks of energy crises and carries or even eliminates “associated benefits.”

The White House also criticizes DeFi — dapps “create serious risks for investors and the financial system as a whole due to the use of leverage and the execution of supervisory functions without proper regulatory compliance.”

In conclusion, there is a call for agencies to “apply the lessons learned by civilization and rely on economic principles in regulating digital assets.”

Paradigm co-founder Fred Ehrsam noted that the Economic Report is 15% crypto FUD.

15% of the annual White House Economic Report is devoted to crypto FUDhttps://t.co/lQlAyXgfyJ pic.twitter.com/RTZacgXSUg

— Fred Ehrsam (@FEhrsam) March 21, 2023

CEO of the Blockchain Association Christine Smith called it “disappointing,” noting the “growing allergy” of the White House to the burgeoning crypto industry. She saw risks for the United States in creating obstacles to a global tech revolution.

End/ …We urge the Biden administration to consider how it will be remembered: as a leader of profound innovation or a roadblock to a global tech revolution.” https://t.co/zMa4vvrNXS

— Blockchain Association (@BlockchainAssn) March 22, 2023

At the end of January, the White House urged Congress to step up efforts to oversee the digital asset market.

In February the Fed, FDIC and OCC warned banks about risks of liquidity associated with crypto firms.

The SEC chief, Gary Gensler, called regulation of cryptocurrencies a priority for 2023. Later the agency put up for public discussion a proposal to expand and strengthen the role of qualified custodians with respect to digital assets.

Previously, Gensler said the cryptocurrency market is centralized. He urged platforms to approach the SEC about whether a given asset qualifies as an investment contract. He also warned of possible prosecution of unregistered Bitcoin exchanges.