As the Biden administration has worked in recent months to develop cryptocurrency regulations, the U.S. government finds itself caught between two extremes: unwilling to actively block cryptocurrency transactions for fear of restricting a growing and potentially lucrative industry but also determined not to give up completely on policing illegal cryptocurrency payments and going after their role in the cybercrime ecosystem. In a recent executive order and subsequent strategy documents, President Biden has pledged to both support development of cryptocurrencies and to restrict their illegal uses, two goals that the United States has long struggled to reconcile when it comes to digital money. And the Biden administration made clear in their executive order just how much the U.S. government wants to have it both ways, touting the potential benefits of virtual currencies for “responsible financial innovation” as well as the risks they pose to consumers, investors, and the “financial stability and financial system integrity.” The executive order extended to all digital assets—not just cryptocurrencies—including other property that exists only in a digital form, such as non-fungible tokens. But of all forms of digital assets, cryptocurrencies are the kind that present the biggest security risks, as well as the greatest potential economic benefits.
In the past year, the balance struck by the U.S. government between encouraging entrepreneurial cryptocurrency ventures and discouraging criminal activities leveraging cryptocurrencies seems to have shifted somewhat, due both to the volatility of the virtual currencies themselves as well as the growing concerns about the types of crimes enabled by those currencies. In particular, the United States seems increasingly interested in developing domestic cryptocurrency policies that can have a global impact on overseas criminal enterprises, including sanctioning cryptocurrency exchanges and individual cryptocurrency wallets, as well as recovering cryptocurrency payments made to criminals. While these are restrictions on the behavior of U.S. individuals and companies, they are ultimately aimed at overseas criminal operations and making it more difficult for those foreign actors to profit from international cybercrime. It is too soon to say whether these recent measures will be effective or enforceable or whether they can be scaled up to address the full extent of the challenges posed by cryptocurrencies. But it is clear that they mark a significant step forward in the history of U.S. cryptocurrency regulation in terms of how aggressive the government is willing to be about going after criminal virtual currency enterprises and also how willing it is to enter the virtual currency space itself with a potential central bank digital currency (CBDC).
Sanctions, arrests, and ransom reclamations
Few countries have excelled at writing and enforcing clear regulations governing digital currencies, but even by the standards of a profoundly ambiguous and poorly enforced area of regulation, the United States has struggled when it comes to defining not just what policies to promote but also what the goals of those policies should be. China, for instance, has taken a strong stance against cryptocurrencies by banning all transactions of virtual currencies in hopes of cracking down on cybercrime and fraud, and it has simultaneously begun rolling out a state-backed blockchain services network. El Salvador’s government, by contrast, has made Bitcoin a form of legal tender, requiring that all businesses accept the cryptocurrency as payment and creating a $150 million trust to facilitate conversions between Bitcoin and dollars. The United States has largely split the difference by extending many existing financial regulations to the cryptocurrency market in the United States. Know Your Customer laws and anti-money laundering policies and procedures have been applied to U.S. cryptocurrency exchanges for years, but these measures have done little to prevent people from simply using exchanges in other countries for their illicit transactions.