US President Joseph Biden’s recent executive order outlines the administration’s first take on regulating the digital asset industry, which includes cryptocurrency and non-fungible tokens. The order lays out six policy objectives and calls on federal agencies to produce reports on how these objectives interact with the industry.
As a result of retail and institutional customers worldwide adopting the use of digital assets, state and federal government agencies have turned significant attention on the industry. The current global cryptocurrency market cap is approximately $2.04 trillion. Cryptocurrencies and non-fungible tokens (NFTs) are two of the most well-known types of digital assets in use. Digital assets are actively bought and sold, traded, custodied, loaned and collateralized, and speculated on by retail and institutional investors without neatly fitting within one (or any) regulatory regime.
The fast-developing nature of distributed ledger technology and digital assets and their integration into various industries has created a conundrum for regulators, where it is difficult to fit the evolving technology into current regulatory regimes. States have attempted to fill this regulatory gap through various methods, such as implementing new regulations or expanding the reach of current regulations.[1] On the federal level, there have been various initiatives relating to the regulation of digital assets, depending on the specific nature of the digital asset.[2] The federal government has thus far primarily focused on the use of digital assets in terrorism and illicit financing.[3]
On March 9, 2022, President Biden released the Executive Order on Ensuring Responsible Development of Digital Assets, which outlines the Biden-Harris administration’s first official response to the digital assets industry.
The executive order highlights the absence of uniform oversight and standards applicable to the industry, stating that such absence may result in inadequate protections for sensitive financial data, custodial and other arrangements relating to customer assets and funds, or disclosures of risks associated with investments in digital assets.
In addition, the order outlines six policy objectives with respect to digital assets:
(1) Customer, investor, and business protections
(2) Financial stability and systemic risk mitigation
(3) Illicit finance mitigation and national security risks
(4) Ensuring continued leadership in the global financial system and economic competitiveness by the United States
(5) Financial inclusion
(6) Responsible development and use of digital assets
In light of the above objectives, the executive order directs federal government departments and agencies, working in collaboration, to produce various reports, frameworks, analyses, and regulatory and legislative recommendations to the administration (together, the reports). The reports will aim to provide substantive information relating to the interaction of the digital asset industry with the outlined policy objectives of the United States, and more specifically relating to a central bank digital currency (CBDC). The following briefly summarizes the reports to be provided.
Central Bank Digital Currency
The secretary of the US Department of the Treasury will report on the future of money and payment systems; in other words, the development of a US CBDC. Specifically, the Treasury will report on the conditions for broad adoption of such technology, the extent to which technological innovation may influence such development, and the implications for the US financial market and payment systems, as well as modernization of and changes to the payment system, economic growth, financial inclusion, and national security. The Treasury, in consultation with the Federal Reserve and US attorney general, will provide a policy recommendation including potential regulatory and legislative actions as well as proposals for the development and implementation of a US CBDC.
In addition, the director of the Office of Science and Technology Policy and the chief technology officer of the United States will provide a report detailing a technical evaluation of the technological infrastructure, capacity, and expertise that would be necessary at relevant agencies to facilitate and support the introduction of a US CBDC system.
Financial Stability, Mitigating Systemic Risk, and Strengthening Market Integrity
The Treasury will provide a report outlining specific financial stability risks and regulatory gaps posed by various types of digital assets and provide recommendations to address such risks. The report will consider particular features of the various types of digital assets and include recommendations that address the identified financial stability risks posed by these digital assets, including any proposals for additional or adjusted regulation and supervision as well as for new legislation.
Specifically, the Treasury will consult with the Department of Labor, Federal Trade Commission, Securities and Exchange Commission, Commodity Futures Trading Commission, Consumer Financial Protection Bureau, and federal banking agencies to assess the implications of development and adoption of digital assets and changes in financial market and payment system infrastructures for US customers, investors, and businesses.
Illicit Financial and National Security Risks
The Treasury will submit to Congress a national strategy for combating terrorist and other illicit financing and, based on its conclusions, develop a coordinated action plan for mitigating the digital asset–related illicit finance and national security risks addressed.
The US attorney general will report on how the United States can work to strengthen international law enforcement cooperation for detecting, investigating, and prosecuting criminal activity related to digital assets. This is of particular concern to international governments and their assessments of how digital assets may be more appropriately monitored and regulated with respect to global sanctions in the future.
Further, the Treasury has been tasked with developing a framework for interagency international engagement with foreign counterparts and in international fora, such as the Financial Action Task Force and Financial Stability Board, to adapt, update, and enhance adoption of global principles and standards for how digital assets are used to transact, and to promote development of digital asset and CBDC technologies consistent with the values and legal requirements of the United States.
Climate Change
The director of the Office of Science and Technology Policy will provide a report on the connection between distributed ledger technology and economic and energy transitions, including the potential for such technologies to impede or advance efforts to tackle climate change, and the effects such technologies have on the environment.
The policy objectives outlined in the executive order address the multitude of ways digital assets interact with other industries and the various legal concerns that arise, such as transactional, corporate, finance, intellectual property, and litigation issues, with a focus on the impacts of CBDCs on the administration’s policy objectives. It is premature to predict the exact impacts of the order; however, the objectives outlined are expansive and likely to yield significant industry-wide changes as a result of the Biden-Harris administration’s research and reporting.
That being said, we do not expect immediate changes to result from the executive order, particularly without congressional action. Congress continues to take interest in digital assets, as evidenced by the 35 different bills introduced in 2021 focusing on cryptocurrency regulation, applications of blockchain technology, and central bank digital currency. Various legislative proposals have been or are anticipated to be submitted to Congress, though it is too early to anticipate the impact of such legislation.[4]
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[1] For example, New York’s BitLicense regulations, Louisiana’s recently adopted Virtual Currency Business Act, and Wyoming’s Special Purpose Depository Institutions, and the various states that have implemented custody and transmission of virtual currency into their current money transmission regulations.
[2] For example, the US Securities and Exchange Commission has provided informal and general guidance with respect to whether a digital asset is a “security” for purposes of the federal securities laws. See Hinman, William, Director, SEC Division of Corporation Finance, “Digital Asset Transactions: When Howey Met Gary (Plastic),” Remarks at the Yahoo Finance All Markets Summit: Crypto (June 14, 2008). The agency has also issued investor alerts relating to the offer, sale, and trading of digital assets. See, e.g., SEC Investor Alert, “Digital Asset and ‘Crypto’ Investment Scams,” (Sept. 1, 2021). It has also brought numerous enforcement actions in the digital asset space. See generally “SEC Maintains Focus on Cryptocurrency Enforcement under Chair Gensler,” The National Law Review (Mar. 23, 2022). In addition, the Financial Crimes Enforcement Network (FinCEN) has been a leading agency to provide guidance to the digital asset industry since it issued its first virtual currency guidance in 2013. See FIN-2013-G001, “Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies” (Mar. 18, 2013).
[3] For example, FinCEN’s long focus on the use of cryptocurrency in illicit activities and addition of digital wallet addresses to OFAC sanctions lists, the Department of Justice’s creation of a Cyber Digital Task Force that focuses on criminal misuse of cryptocurrencies and digital assets, and the Office of the Comptroller of the Currency permitting national banks and federal savings associations to engage in certain cryptocurrency, distributed ledger, and stablecoin activities, among other federal engagement in the space.
[4] Various bills relating to digital assets have been introduced or are anticipated to be introduced. For example, Senator Lummis (R-Wy) is expected to introduce a legislative proposal that would provide an optional charter regime for stablecoin issuers and establish an optional self-regulatory organization for digital asset market participants, among other things. While such a bill would go further than any other legislation if enacted into law, it would not cover the breadth of topics the executive order attempts to address.