Joe Biden finds a way to please the crypto crowd

Around a century ago, Hermann Rorschach developed a psychological test that still bears his name today. To assess his patients' mental state, he presented them with a series of inkblots and asked them to describe the image or emotion each design evoked.

Although his intentions were different than those of a Swiss psychoanalyst, Joe Biden launched a similar exercise in the financial world this week when he issued a long-awaited executive order on digital assets that somehow managed to generate a positive response from the cryptocurrency community.

The US president's statement was short on policy details. There were no new rules for cryptocurrencies or additional requirements for the players and platforms in a multi-trillion-dollar trade with lots of leverage, strong derivatives activity and passionate investors convinced they had found “the next big thing” in finance.

Biden's marching orders were for his bureaucracy. To prepare the way for federal regulation, he called for a series of reports, assessments, and consultations involving much of the government's executive branch and set deadlines for their completion that ranged from 90 days to a year.

One would think that all this whispering within the Beltway would deter crypto partisans known for their libertarian leanings. But like a Rorschach subject looking at an inkblot and imagining a butterfly, they liked what they saw. Among the more than 5,000 words of the executive order were several sentences that delighted the crypto community.

Among them was Biden's commitment to "strengthen U.S. leadership in the global financial system," including through "the responsible development of payments innovations and digital assets." They were also pleased that he saw the potential for a U.S. central bank digital currency “to promote greater access to the financial system,” and made a point of studying how such an innovation would work in practice.

This matter-of-fact tone of the executive order helped calm the nerves of a crypto community that was openly worried that the Biden administration didn't like it - and may be tempted to crack down now to stop Russia from using blockchains to avoid sanctions imposed after it invaded Ukraine. Although it is risky to attribute daily crypto price movements to fundamental factors, it is worth noting that the leading digital currencies rose sharply following the White House announcement on Wednesday.

“The executive order is a step forward,” said Christopher Giancarlo, who earned the nickname “CryptoDad” for his welcoming approach to digital currencies when he was chairman of the U.S. Commodity Futures Trading Commission. “I commend the White House for a balanced, comprehensive, and forward-looking executive order on digital assets.”

The nature of the reports ordered by the president suggests that his administration still has many concerns about cryptocurrencies. Biden has asked officials to consider their impact on national security, financial stability, money laundering and other illegal activities, consumer protection, privacy and energy consumption.

But Sarah Hammer, a former Treasury Department official who is executive director of the Stevens Center for Innovation in Finance at the University of Pennsylvania's Wharton School, said the sheer severity of the Biden executive order should be reassuring to digital asset entrepreneurs.

“It mobilizes resources for the type of research and studies needed to implement regulations effectively and more quickly,” she said. “It is critical to call on agencies to coordinate.”

How much time will pass before a formal US crypto policy takes shape is unclear. Biden, for example, has given officials 180 days to figure out whether new laws would be needed if the U.S. pursues a central bank digital currency. If a new law is required, Congress would have to step in, and that would likely slow things down even more.

Meanwhile, the bet in the industry is that crypto companies will be subjected to regulation through enforcement. Securities and Exchange Commission Chairman Gary Gensler has been particularly vocal about this possibility, arguing, for example, that crypto trading and lending platforms that promise returns are wrong if they believe they can avoid scrutiny under existing laws.

Gensler underscored his point last month when a New Jersey crypto company called BlockFi agreed to pay $100 million to the SEC and 32 U.S. states to settle charges that it offered interest-bearing accounts — which promised annual percentage returns far exceeding those on bank savings accounts — to investors without registering them as securities. BlockFi has neither admitted nor denied the SEC’s allegations.

This type of regulation can be significantly more painful than reading the prose of a presidential executive order. I'm no Rorschach, but perhaps it helps explain why Biden's dry list of policy goals and research mandates has found such an appreciative audience in the crypto community.

gary.silverman@ft.com