Biden Administration Takes Positive Steps on Crypto, But Its Social Value Remains in Question

Earlier this month, President Biden took a potentially important step towards regulating cryptocurrencies with an executive order aimed at clarifying the government’s position on digital assets. The administration is signaling a slow and deliberative approach, which should give the industry valuable time to demonstrate its usefulness and address concerns about the sector.

It was not long ago that few took interest in digital currencies like Bitcoin. Investors were largely “gold bug” investors and libertarians clamoring to “end the Fed.” Today, however, 16 percent of Americans say they have invested, traded or used cryptocurrencies. Among millennials, the number is considerably higher. Turn on an NFL game and you are likely to see advertisements for Crypto.com, highlighting how mainstream the industry now is.

And yet, the crypto industry is still finding its footing. Aside from functioning as a tool for speculation or (maybe) a hedge against inflation, crypto’s role in the coming decades has yet to be clearly defined. The same is true of stablecoins and other aspects of the digital financial economy, such as nonfungible tokens. Even blockchain, a recordkeeping technology associated with cryptocurrencies which holds promise far beyond finance, has yet to realize its potential.

Due to these developments, it’s not surprising that government regulators are taking increasing interest. Biden’s executive order is long and covers many topics, but essentially does two things:

First, it lays out various policy objectives in the realm of digital assets. The vision is essentially that these technologies are an impressive form of financial innovation that should be brought into the regulatory fold. Because they pose risks, however, these must be carefully weighed against potential benefits.

Second, the order instructs various federal agencies to conduct research and produce a plethora of reports on these technologies. These will focus on consumer protection, as well as implications for national security, competition, financial inclusiveness, and even climate change. Several reports will explore the creation of a central bank digital currency.

For those calling for a heavy-handed regulatory approach, the executive order may prove a disappointment because it does not directly task agencies with regulating in a specific manner. On the other hand, regulations are almost certainly forthcoming, if not by this administration, then by a future one, and the order does call for proposals from agencies.

Hopefully, the forthcoming reports clarify exactly what tangible problems might necessitate regulation. A variety of criticisms have been leveled at cryptocurrencies, from the idea that they exacerbate climate change through their high energy use to that they encourage terrorism and human trafficking by facilitating anonymous monetary transactions. The scale and scope of these problems is not always well-defined, however.

From an economic point of view, one feature of the digital currency market that is concerning is its zero-sum nature. When crypto goes up in value, one person only gains because another person is willing to pay more than they initially did. That means that while individual investors can come out ahead, on the aggregate level, there is no wealth created in the process of buying and selling tokens.

For this reason, the high electricity costs associated with mining Bitcoin are a legitimate concern,  because these are real economic costs that are financing a market that primarily redistributes — rather than grows — the economic pie.

Equally if not more important are the high human capital costs associated with cryptocurrencies. Top business schools like MIT and Wharton now have entire projects and programs devoted to them, and Silicon Valley, as opposed to Wall Street, is quickly becoming where the best and brightest business minds want to start their careers.

This reallocation of talent caries a cost. As much as people love to criticize Wall Street, its role in the economy is fairly unambiguous and positive. Without investors channeling the public’s savings into productive investments, there would be no economic growth and hence no progress.

The social value of cryptocurrencies, on the other hand, is far less obvious. In the sense that cryptocurrency exchanges are forums for electronic speculation, they resemble online betting — but even Las Vegas creates some value. The clearest example is the city itself and its broader economy. Without legalized gambling, it would just be a desert outpost. Thus, the question we should ask about the crypto industry is: What productive capital wouldn’t exist in its absence?

Despite this as-yet-unanswered question, there is not necessarily a slam-dunk case for regulating crypto. Many markets produce products of dubious value, but that does not mean government regulators can do any better. TV soap operas seem to have little redeeming value, but should governments ban them?

Or consider Coke and Pepsi, who spend billions in global advertising to one-up each other every year. This too is a costly zero-sum competition. Not every market failure has a better government alternative. Governments must demonstrate they have a solution; otherwise, they are likely to make matters worse.

If the crypto sector wants to remain vibrant and relatively free of regulation, it’s going to have to prove that it’s more than just an online casino. To Biden’s credit, his new executive order allows for that. It directs regulators to study the issues at hand without committing to a particular approach, and this gives the market time to mature.

But so long as so many resources are piling into this sector, including some of the most promising young talent in the country, crypto is going to raise attention and calls for regulation. Entrepreneurs leading this sector should take advantage of the current lull in the regulatory tide to demonstrate how their industry creates value for more than just enthusiasts willing to roll the dice.

James Broughel is a senior research fellow with the Mercatus Center at George Mason University.