Noting the explosive use of digital assets across international
financial sectors/markets, President Biden signed an Executive Order (EO) on Ensuring Responsible
Development of Digital Assets, calling for a
whole-of-government approach to address the opportunities and
inherent risks associated with digital assets, while harnessing
their potential benefits and underlying technology. Digital assets
have surpassed a $2 trillion market cap with
over 40 million Americans having invested in, traded, or used
cryptocurrencies. President Biden's EO identifies six key
priorities, chief amongst them having the United States take a
leading role in international engagement regarding governance of
digital assets. The President's stated goal is to maintain U.S.
technological leadership and support innovation, while mitigating
risks for consumers, businesses, the broader financial system, and
the environment.
This summary underscores the key priorities and initiatives of the
executive order, as well as the industry expectations for what lies
ahead. Digital asset market participants should take note of the
affirmative steps outlined in the EO, as they are likely precursors
to broader regulations that may soon follow.
1. Protect U.S. Consumers, Investors, and Businesses
Citing digital asset volatility as an example of potential
consumer/investor risk, the EO calls on numerous federal
departments and agencies, including the Department of Treasury, to
conduct assessments and develop policy recommendations to create a
more equitable, inclusive, secure, and efficient digital asset
sector. On the regulatory front, the executive order encourages
relevant agencies to develop safeguards that protect
consumer/investor interests.
2. Protect U.S. Global Financial Stability and Mitigate Systemic Risk
The EO calls on the Financial Stability Oversight Council to assess
and mitigate financial risks associated throughout the U.S. economy
and beyond. When coupled with the ongoing Russia-Ukraine conflict,
this all but guarantees that the Biden administration will engage
in heightened scrutinization of certain digital assets and how they
are undercutting U.S. sanctions and other prohibitions.
3. Mitigate the Illicit Finance and National Security Risks Posed by the Illicit Use of Digital Assets
A large point of emphasis noted throughout the executive order
pertained to national security risks related to digital assets. The
order calls for coordinated action amongst a plethora of government
agencies to mitigate risks at a domestic level, while also
directing the state department to work with U.S. allies and
partners to create and maintain frameworks, capabilities, and
partnerships designed to respond to such risks. Cybercriminals have
increasingly exploited the decentralized and unidentifiable nature
of digital assets to carry out financial crimes. The steps noted in
the order signify an affirmative approach toward cracking down on
the exploitable characteristics of digital assets and are likely to
be followed by a broader legislative and regulatory push.
Coinciding with the release of this EO, the Treasury
Department's FinCEN also this week issued a detailed
advisory regarding compliance risks for cryptocurrency
exchanges and financial institutions, reminding companies of the
range of risks that are particularly on point in light of the
Russian invasion of Ukraine and flight of assets from different
markets. We recommend that clients involved in cryptocurrency
review their compliance measures accordingly.
4. Promote U.S. Leadership in Technology and Economic Competitiveness to Reinforce U.S. Leadership in the Global Financial System
The Department of Commerce is directed to work across various
sectors of the U.S. government to establish frameworks that drive
U.S. competitiveness and leadership through leveraging digital
asset technology. This is a welcomed initiative by the crypto
industry, who have long called for U.S. leadership in the digital
asset environment, especially with the Chinese having effectively banned the use of
cryptocurrency.
President Biden's directive also orders the U.S. government to
study and support technological advances in designing and
implementing digital asset systems, while focusing on prioritizing
privacy and security, combating illicit exploitation, and reducing environmental impacts.
5. Promote Equitable Access to Safe and Affordable Financial Services
Acknowledging the inequities prevalent in access to safe and
affordable financial services, the order emphasizes digital asset
innovation considering such inequities and disparate impact risks.
The EO calls for the Secretary of the Treasury, and other relevant
agencies, to produce a "Future of Money and Payment
Systems" report that specifically includes suggestions
regarding economic growth, financial growth and inclusion, national
security, and the extent to which technological innovation may
influence the future. The report will also address how the current
financial system may not meet consumer needs.
6. Explore a U.S. Central Bank Digital Currency (CBDC)
The use of CBDCs on an international level is a rising trend with
almost 100 countries already in the research and development
process. The goal for CBDCs is to establish standards for design
and cross-border systems. At the moment, China is leading in the research and
development of CBDCs, with an increasing number of
consumers using technology for transactions and finances. To stay
competitive, the EO urgently calls for the consideration of a
potential U.S. CBDC as a tool for both macroeconomic stabilization
and to promote U.S. priorities and democratic values abroad. In the
meantime, the order encourages the Federal Reserve to continue
research related to a U.S. CBDC and its implications on U.S
monetary policy.
General Compliance Advice Going Forward
We recommend organizations review their current customer and vendor
relationships, as well as any prospective transactions, that could
involve or be impacted by digital assets. Furthermore, we encourage
entities that currently use digital wallets to closely monitor the
evolving regulatory environment for changes throughout 2022.
Companies should take the following key actions:
- Conduct a regulatory review to ensure that you are complying with all laws and regulations.
- Update legal memos: If you have received a Howie memorandum in the past, it is time to reevaluate your token offering or product offering.
- Review or create an Anti-money Laundering/Know Your Customer/OFAC compliance program.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.