What did Biden get wrong on crypto? His new order threatens to smother innovation.

President Joe Biden released an executive order Wednesday that could curtail opportunities that cryptocurrency provides for economic advancement, notwithstanding the order’s hopeful tone about crypto’s potential to promote efficiency and financial inclusion. Ironically, the order may also introduce new financial risks in the name of preventing them.

The White House fact sheet on the order notes correctly that the rise of cryptocurrency “creates an opportunity to reinforce American leadership in the global financial system and at the technological frontier.”

That cryptocurrency advances American values such as liberty and democracy has been shown by Ukrainian leaders' and citizens' creative use of cryptocurrency byproducts like stablecoins and NFTs (non-fungible tokens) to raise funds to fight Russian forces and advance a message of freedom.

Pro-democracy movements

Crypto assets have also played an essential role in recent protests in Hong Kong and other pro-democracy movements.

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That’s why it’s essential that regulatory agencies don’t use a sledgehammer approach that would stamp out legitimate uses of cryptocurrency in the name of catching bad actors. Biden’s executive order emphasizes coordination of various agencies involved in cryptocurrency regulation but is silent on the need for those agencies to adhere to the rule of law and refrain from exceeding powers given to them by Congress.

This omission in the order is unfortunate because the Securities and Exchange Commission in both the Trump and Biden eras has stretched its authority over “securities” to go after cryptocurrencies that clearly don’t fit the legal definition. As a result, U.S. citizens lack access to legitimate cryptocurrencies such as Ripple’s XRP – the object of punitive actions by the SEC now being challenged in court – that are widely available in other countries and have many practical uses.

Most concerning about the executive order is its seeming embrace of central bank digital currencies that would be issued by the Federal Reserve. The order calls for the “highest urgency on research and development efforts into the potential design and deployment options of a United States CBDC.” Yet it pays scant attention to numerous downsides of government-run cryptocurrency, such as massive risks to privacy and financial stability.

U.S. may issue its own crypto

If the Fed – rather than the private sector – were to issue its own cryptocurrency, the U.S. government would have direct access to the digital ledger that records financial transactions for individuals using that currency. As Paul Jossey, cryptocurrency attorney and adjunct fellow at my organization, the Competitive Enterprise Institute, has written, current “know your customer” rules governing banking “will ensure governments track, record, and identify every or nearly every CBDC transaction.”

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Even with safeguards, the information on individual purchase and investment decisions the Fed would store would be vulnerable to hacking and abuses. We don’t have to look far to see recent hacking incidents at government agencies, as well as selective illegal leaks of tax returns, to imagine the abuses that could occur if the government directly held more data on millions of consumer financial transactions.

A central bank digital currency in the United States also could threaten the availability of business and consumer credit by causing a reduction of deposits at private banks as individuals transfer their savings directly to the Fed. Shrinking deposits at private banks would mean they would have much less money with which to fund loans.

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The Federal Reserve would become a direct, politically pressured, unfairly advantaged competitor to private banks and could crowd out private-sector innovation in development of new cryptocurrencies and the emerging financial technology known as fintech.

Crypto promotes financial inclusion

All for what? CDBCs are a solution in search of a problem, because as Biden’s order itself notes, cryptocurrency products are already advancing financial inclusion. If that’s the case, why introduce unneeded risk with direct government involvement in the sector?

The Biden administration and other policymakers need to recognize that the biggest threat to financial stability with regard to cryptocurrency is overregulation that smothers innovation – and the prospect of government-issued digital currency that could massively distort the financial system.

John Berlau is senior fellow and director of finance policy at the Competitive Enterprise Institute. He is the author of "George Washington, Entrepreneur."

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This article originally appeared on USA TODAY: Biden executive order on crypto may kill financial innovation