Biden Executive Order Calls For Regulatory Proposals On Digital Assets And Central Bank Digital Currency - Fin Tech

On March 9, 2022, President Biden signed an executive order titled "Ensuring Responsible Development of Digital Assets" (the "Order").¹ The Order directs a broad range of federal agencies to recommend legislative and regulatory proposals to foster the development of, and address the risks presented by, digital assets and a central bank digital currency ("CBDC").

The Order is the next step in the development of a regulatory framework for digital assets and CBDC in the United States. As digital assets markets have emerged and rapidly grown over the past decade, the applicability of US financial laws and regulations to digital assets has remained unclear. How the US regulatory framework should be modernized to address digital assets remains the subject of significant debate, with sharp differences in views among regulators, market participants, and academics. The actions contemplated under the Order will hopefully reconcile or resolve some of these differences, at least within the federal government.

While the Order has been eagerly anticipated by many in the digital assets world, it does not itself directly change any regulation of digital assets or dictate a preordained outcome for digital asset regulation. Instead, the Order acknowledges a diverse set of relevant public policy and regulatory considerations and sets in motion a process that could produce regulatory proposals around which a consensus could be reached on how Congress and financial regulators should modernize US regulations to incorporate digital assets. Accordingly, the ultimate success or failure of the Order—and the ideas it promotes—will depend on the quality of the reports produced pursuant to the Order and whether Congress and, to a lesser extent, financial regulators seek to adopt the reports' recommendations.

This Legal Update provides an overview of the Order and includes a chart in Appendix A detailing each of the reports to be produced pursuant to the Order and the deadlines for their completion.

Digital Asset Regulation

REGULATORY JURISDICTION OVER DIGITAL ASSETS

Many market participants have been hoping for clarity regarding which US federal agency or agencies have jurisdiction over digital assets. It appears they will have to wait. While the Order provides clarity as to which regulatory agencies will be responsible for developing certain reports and making particular recommendations with respect to digital asset regulation, it does not provide a clear framework for which agencies will ultimately be responsible for regulating digital assets. While the Order does note that "many activities involving digital assets are already within the scope of existing [US] laws and regulations," it is unclear which specific activities the Order is referring to. If anything, the inclusion of so many agencies in the Order implies that digital assets could continue to be subject to overlapping regulation at the federal level.

IMPLEMENTATION OF THE ORDER

The implementation of the Order will be coordinated by the Assistant to the President for National Security Affairs (National Security Advisor Jake Sullivan) and the Assistant to the President for Economic Policy (National Economic Council Director Brian Deese). The fact that the Order was issued by, and is being coordinated through, the White House may signify the importance of digital asset regulation to the Biden administration.

Agencies involved in implementing the Order will include, as necessary, the Department of the Treasury; the Departments of State, Defense, Justice, Commerce, Labor, Energy, and Homeland Security; the Environmental Protection Agency; the Office of Management and Budget; and the Office of the Director of National Intelligence. The Order also invites representatives of other agencies to attend interagency meetings as appropriate, including representatives of the Board of Governors of the Federal Reserve, Consumer Financial Protection Bureau, Federal Trade Commission, Securities and Exchange Commission, Commodity Futures Trading Commission, Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency. Each of these agencies covers at least one of the regulatory priorities identified by the Order.

POLICY PRIORITIES

The Order establishes the Biden administration's policy priorities for the regulation of digital assets. Notably, it does not impose any new policies directly on digital assets or digital asset issuers or service providers. Instead, it directs federal agencies to study issues relevant to the digital assets markets, ranging from consumer protection to illicit finance, and to produce reports. Most of these reports are required to include recommendations for legislative and regulatory reform to address risks and regulatory gaps identified by the reports.

The Order categorizes the administration's policy priorities with respect to digital asset regulation in the following six areas: (1) consumer and investor protection, (2) financial stability, (3) illicit finance, (4) US leadership in the global financial system and general economic competitiveness, (5) financial inclusion, and (6) responsible innovation. To facilitate these priorities, the Order commissions 19 different regulatory actions (most of which are reports), as detailed further in Appendix A, that will be carried out by a wide variety of federal agencies. Most of these actions and reports have milestones or dates for completion within the next six to nine months.

Consumer and Investor Protection and Financial Stability

The Order reveals (not unsurprisingly) that the Biden administration's most important policy priorities for digital assets are consumer and investor protection. Of the 19 reports or actions commissioned by the Order, 15 have direct ties to consumer or investor protection and risks to financial stability. Moreover, during the background call with respect to the Order, a senior Biden administration official noted that "an American approach to digital assets is one that encourages responsible innovation by decisively mitigating the risks, in particular the financial stability and consumer protection risks" (emphasis added) associated with digital assets.2 The official also expressed concern that "certain earlier forms of financial innovation have ended up hurting American families while making a small group of people very rich," underscoring the need for robust consumer and investor protection.

With respect to consumer protection, reports will consider certain issues:

The extent to which existing consumer, privacy, investor, and market protection regulations and regulatory measures may be used to address the risks of digital assets and whether additional measures may be needed.
The conditions that would drive mass adoption of different types of digital assets and the risks and opportunities such growth might present to US consumers, investors, and businesses.
How technological innovation may impact these efforts, with an eye toward those most vulnerable to disparate impacts.
Expanding access to safe and affordable financial services.

With respect to financial stability, the reports and actions commissioned by the Order cover issues such as:

Financial stability risks and regulatory gaps posed by various types of digital assets.
Particular features of various types of digital assets and recommendations that address the identified financial stability risks posed by these digital assets.
What, if any, effects the growth of digital assets could have on competition policy.

Illicit Finance

The Order also clearly establishes as another administration priority the development of a framework to prevent the use of digital assets in illicit finance. The Order asserts that "digital assets have facilitated sophisticated cybercrime-related financial networks and activity, including through ransomware activity." The background call to the Order also expressed concern that "most current digital asset systems were not designed with critical controls in mind like identity, sanctions screening, and revocability of illicit transactions." Five of the 19 regulatory actions imposed by the Order relate directly to either illicit finance, anti-money laundering, or law enforcement.

This policy priority aligns with recent actions by the Department of Justice ("DOJ"). In October 2021, DOJ announced the creation of the National Cryptocurrency Enforcement team to spearhead complex investigations and prosecutions of criminal misuses of cryptocurrency and to recover illicit proceeds of crimes facilitated by cryptocurrency. This came on the heels of DOJ's development of a Cryptocurrency Enforcement Framework in October 2020, which laid out DOJ's view that cryptocurrency is likely here to stay and should be addressed by law enforcement. The reports requested by the Order seek to develop an even more robust mechanism for preventing cryptocurrency's use for illicit means.

International Role in Digital Assets

Maintaining US economic competitiveness (and, perhaps, the dollar as the world's reserve currency) is another priority under the Order. Four of the 19 regulatory actions directly focus on solidifying the United States' role in the international digital asset marketplace. The Order directs the Treasury to establish a framework for international engagement related to digital assets with the twin goals of facilitating the adoption of global principles and standards for how digital assets are used and transacted, and promoting the development of digital asset and CBDC technologies consistent with US values and legal requirements. During the background call with respect to the Order, the senior Biden administration official highlighted that many of the countries currently exploring CBDCs are also "working together to set standards for CBDC design and cross-border systems." According to the official, this will have "implications for domestic and international priorities including the centrality of the US dollar in the global financial system," and the official noted that the Order is designed to ensure that the United States has a leadership role in this process.

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Footnote

1. White House, Executive Order on Ensuring Responsible Development of Digital Assets (March 9, 2022), https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets/.

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