On 9 March 2022, the Biden Administration issued its long-awaited Executive Order on Ensuring Responsible Development of Digital Assets seeking to establish a unified US federal government approach to the regulation of digital assets.1 Simply put, for those in the digital asset business – from investors to service providers, NFT holders to large financial institutions, and many more – the Executive Order is critical in understanding how US regulation of such assets will develop in the coming years.
The Executive Order notes the Administration’s concerns with, among other things, addressing consumer and investor protection; financial stability; illicit finance; US leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation. These concerns animate and instruct the following stated goals:
Developing a digital dollar
To lay the groundwork for issuing a US CBDC,2 the Executive Order calls on the Secretary of the Department of the Treasury (Treasury or Treasury Department), the Board of Governors of the Federal Reserve System, and the Attorney General to research and report on the economic, financial, monetary, national security, law enforcement, and legislative implications of a US CBDC. With these reports in hand, the Attorney General will then provide a legislative proposal for issuing a US CBDC.3
Because CBDCs have the potential to significantly impact cross-border payments and displace existing currencies, the Executive Order also calls on the Secretary of the Treasury to take the lead in establishing an interagency framework for international engagement related to digital assets and CBDCs. This framework will expand existing CBDC-related international cooperation, such as the G7 Digital Payments Experts Group.
Addressing digital assets’ climate impact
The high-energy consumption required for digital asset financial structures is a growing concern among environmentalists. In this light, the Executive Order requests a report from various US federal agencies exploring the short, medium, and long-term effects of new digital asset technologies, such as proof-of-stake cryptocurrency mining, on climate change and the energy sector.
The Executive Order also mandates that the report include research on potential uses of blockchain technology to mitigate climate impacts, such as liability exchanges for greenhouse gas emissions, water, and other natural or environmental assets.
National security and illicit finance risk
The Executive Order details the illicit uses of digital assets and decentralized finance: the facilitation of money laundering, terrorism financing, ransomware, and sophisticated cybercrime.
Notably, the Executive Order comes just days after the Treasury Department issued its 2022 National Risk Assessment specifically addressing the exploitation of the digital economy by criminals, foreign terrorist groups, and rival nations. In response to these issues, the Executive Order calls on several US federal agencies to provide strategic advice on how to effectively mitigate these risks, which have taken on greater import given the conflict in Ukraine.4
The Executive Order also aims to protect US consumers, investors, and businesses from the financial risks posed by a digital asset ecosystem lacking appropriate oversight. In particular, the Executive Order shows concern for the risks digital assets pose to less informed market participants and the potential for these risks to exacerbate social inequities. The Executive Order envisions a regulatory framework that promotes responsible innovation while protecting consumer privacy, data, and assets, providing adequate disclosures to investors, and supporting equitable economic growth.
To that end, the Executive Order requests the Secretary of the Treasury, in consultation with the Secretary of the Department of Labor and key independent agencies,5such as the Federal Trade Commission (FTC), the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Federal banking agencies, and the Consumer Financial Protection Bureau (CFPB), to produce reports addressing specific aspects of the transition to a digital asset economy, including effects on consumers, investors, and businesses. The reports should also include recommendations to protect consumers and support access to safe and affordable financial services.
Mitigating systemic risk
Citing the general principle of “same business, same risks, same rules,” the Executive Order emphasizes that large firms providing digital asset services should comply with the same standards that govern traditional financial firms and that the regulatory framework may need to evolve to cover the additional risks created by each digital asset’s unique characteristics.
To accomplish this, the Executive Order urges the Secretary of the Treasury to convene the relevant US federal financial regulators (e.g., the SEC and the CFTC) and produce a report identifying the specific risks to financial stability posed by digital assets as well as existing regulatory gaps, and to make recommendations to address these risks, which may include proposing additional laws and regulations.
Flurry of activity
The Executive Order comes amid a flurry of recent US federal government research, regulation, and enforcement actions regarding digital assets important to understanding the current state-of-play in the United States. For example, to safeguard retail investors, the Treasury Department’s Financial Literacy and Education Commission recently launched a new effort to educate consumers about digital assets. Meanwhile, concerns that a crisis among stablecoins could result in a “bank run” style panic has led the President’s Working Group on Financial Markets and US federal bank regulators to recommend that stablecoin issuers be required to obtain a bank charter.
On the enforcement front, both the SEC and the Department of Justice recently announced high-profile civil and criminal actions against alleged wrongdoers in the digital asset space. The day before the Executive Order was issued, the SEC charged two siblings with defrauding retail investors out of more than $124 million through fraudulent digital token offerings. And in a headline-grabbing move in February 2022, the Department of Justice arrested a married couple for allegedly conspiring to launder more than $4 billion in stolen cryptocurrency. As part of the latter action, the DOJ seized over $3.6 billion in cryptocurrency in what it touted as the Department’s largest financial seizure ever.
This is not the beginning of the end, and likely is not even the end of the beginning of US digital asset regulation. While the industry has applauded the Executive Order, there is still a need for greater legislative guidance and regulatory clarity. The direct pressure on Cabinet-level officials, indirect pressure on independent agencies, and eventual pressure on the US Congress will only continue to build.6While the Administration can do a lot in regulating digital assets, Congressional action will play a key role in implementing the President’s vision.