United States: Biden Executive Order On Cryptocurrencies And Other Digital Assets Emphasizes Innovation And Regulation

On March 9, 2022, President Joe Biden issued an executive order outlining a "whole-of-government" approach to examining a broad range of potential risks associated with the dramatic growth in digital assets, including cryptocurrencies. Importantly, the executive order states that the Biden administration is interested in promoting responsible financial innovation and US leadership globally, including in the development of global standards for digital assets. The executive order lays the groundwork for increased US regulation of digital assets. However, while it is a crucial first step to addressing currently fragmented regulation, the executive order stops short of establishing a single policy for digital assets. To further demonstrate the necessity of the executive order, Congress remains sharply divided on a path forward on digital currency legislation. The executive order also states that the Biden administration places the "highest urgency" on further research into a potential US central bank digital currency (CBDC).

The executive order requires coordination among, and actions to be taken by, numerous executive branch departments and agencies within specified timeframes. These actions include the submission of certain reports and regulatory and legislative proposals. It also encourages various US regulators to act within their respective jurisdictions. To that end, shortly after the announcement of the executive order, several agencies issued statements echoing positions in the order.

The executive order comes on the heels of other initiatives focused on digital assets, including the Department of Justice's focus on cryptocurrency in both civil and criminal initiatives (such as its appointment of its first National Cryptocurrency Enforcement Team director), the Securities and Exchange Commission's (SEC) continued regulation by enforcement in this area, and recent commentary from the Consumer Financial Protection Bureau (CFPB) on the broader adoption of digital assets in consumer markets.

Key policy priorities

The executive order outlines six key policy priorities.

1. Protecting US consumers, investors and businesses: The executive order expresses concern that the growing use of digital assets and firms providing digital asset services may present increased "risks of crimes such as fraud and theft, other statutory and regulatory violations, privacy and data breaches, unfair and abusive acts or practices, and other cyber incidents." It further states that such risks may be heightened for less informed market participants.
2. Protecting US and global financial stability and mitigating economywide financial risks: The executive order states that digital asset issuers, exchanges and trading platforms, service providers, and other industry participants "may not be subject to or in compliance with appropriate regulations or supervision." Industry participants that present risks to financial stability should "be subject to and in compliance with . standards that govern traditional market infrastructures and financial firms," although evolutionary changes to the current regulatory approach may be required. (In this regard, the executive order reinforces the Financial Stability Oversight Council's role in assessing financial stability risks and regulatory gaps, and preparing recommendations for addressing such risks.)
3. Mitigating money laundering, other illicit finance activity and national security risks: The executive order recognizes that digital assets are used in cybercrime, including ransomware, and may present heightened risks of money laundering, sanctions evasion, terrorist and proliferation financing, fraud and theft schemes, and corruption.
4. Reinforcing US leadership in the global financial system, and technological and economic competitiveness: The executive order states that the US has an interest in ensuring the responsible development of payment innovations and digital assets, including those that underpin international capital flows. It furthers expresses the view that the US can play a role in the global governance of digital assets and should seek to preserve US global competitiveness.
5. Promoting equitable access to safe and affordable financial services:  The executive order states that digital assets could be used to reach underserved populations and to provide more cost-efficient access to financial services.
6. Supporting technological advances that promote responsible development and use of digital assets: The executive order states that innovation in digital assets and digital payments should support national goals by, for example, taking into account privacy and security interests, including controls to protect against illicit exploitation, and focusing on mitigating negative climate impacts.

Interagency coordination and international cooperation

The executive order seeks to establish a coordinated, national approach for digital assets. It directs and/or encourages key executive branch departments - including the departments of Justice, Treasury, State, Defense, Homeland Security and Commerce - and financial regulators (including the prudential bank regulators, the CFPB, the Federal Trade Commission, the SEC, and the Commodity Futures Trading Commission), among others, to take certain actions, such as preparing reports and regulatory and legislative proposals. (We've provided a high-level summary of these actions in the chart below.) The interagency process assigns the Assistant to the President for National Security Affairs and the Assistant to the President for Economic Policy coordinating responsibility for the executive branch actions mandated under the executive order.

The executive order also emphasizes the importance of fostering international cooperation. Among other actions, the executive order directs the development of frameworks for strengthening international law enforcement of criminal activity involving digital assets, and engaging with international partners and in international forums - such as the G7, the G20, the Financial Action Task Force and the Financial Stability Board - on global principles and standards for digital assets and CBDC technologies.

US CBDC

The executive order directs additional efforts to evaluating the risks and benefits of issuing a CBDC, and for US participation and leadership in international CBDC discussions and projects. Among other things, it orders the Secretary of the Treasury, with other stakeholders, to prepare a report on "the future of money and payment systems." The executive order also directs the Attorney General to lead an assessment of whether legislative change is necessary to issue a CBDC and encourages  the Federal Reserve Board to continue its ongoing research into various aspects of a CBDC, including the optimal design for a CBDC and methods of implementation if a CBDC were to be introduced. The executive order indicates that the Biden administration sees development of a CBDC as potentially important to supporting "the continued centrality of the United States within the international financial system" and protecting the "unique role that the [US] dollar plays in global finance."

Comments and outlook

The Biden administration's efforts to study and address the potential risks posed by digital assets span a broad range of policy areas, including financial crime and national security, privacy and consumer protection, investor and market protection, and climate and energy policy, among others. The executive order does not implement any regulatory changes or detail regulatory changes to come. However, the actions that the executive order calls for signal that further regulation of digital assets and industry participants is possible, if not likely. The executive order also suggests that the Biden administration will continue to make it a priority to take action, through law enforcement and regulatory agencies, in response to violations of existing US law. (See, for example, these previous Cooley alerts:  US Justice Department Appoints First National Cryptocurrency Enforcement Director and  OFAC Issues Sanctions Compliance Guidance for Virtual Currency Industry.)

The interagency process established under the executive order indicates that the Biden administration believes effective regulation of digital assets can be accomplished through coordinated action among existing US regulatory agencies. In this respect, many of the actions ordered or encouraged in the executive order appear intended to reinforce initiatives already underway, such as the interim measures proposed  in the report on stablecoins by the President's Working Group on Financial Markets, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency. While overall positive for its approach to understand and address risks in concert, the executive order does not resolve regulatory uncertainty for industry participants where agency jurisdiction remains unclear.

In addition, the executive order is notable for its emphasis on supporting continued innovation, which the executive order suggests may be important to preserving US leadership in the global financial system and US global competitiveness. The executive order's focus on international cooperation is also important to addressing some of the primary challenges that US regulators have faced with respect to digital assets, including anti-money laundering, sanctions evasion, cybercrime and ransomware.

The actions and statements in the executive order regarding a potential CBDC suggest that the Biden administration is accelerating US efforts to explore a CBDC amid a growing number of initiatives by foreign countries to explore or pilot their own CBDCs. This is noteworthy because the Federal Reserve has previously stated that it would only pursue issuance of a CBDC with "clear support" from the executive branch and Congress.

Following the executive order, in the near term we expect:

• Federal financial regulators will continue to regulate by enforcement, and the Department of Justice and law enforcement agencies will continue to prioritize enforcement in the digital assets space.
• The Biden administration will increase its focus on US efforts to explore a CBDC.
• The reporting required by the executive order may result in additional oversight from the congressional committees of jurisdiction.
• The executive order is unlikely to result in significant legislation that can pass both houses of Congress and be signed into law.

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