On March 9, 2022, President Biden issued the Executive Order on Ensuring Responsible Development of Digital Assets (the "Order"). The Order touches on a number of critical legal, regulatory, and economic priorities for the use, development, and growth of digital assets and directs major agencies and regulators to assess the impact of digital assets in their respective fields and to make findings and recommendations for legislative and/or regulatory action. Significantly, the Order directed the Secretary of the Treasury to submit a report containing finds on the potential risks and benefits associated with the issuance of a central bank digital currency ("CBDC") by the United States. We have reviewed and summarized the contents of the Order, which we believe to be a strong signal of this administration’s commitment to regulate and police the digital asset space while simultaneously expanding the government’s role as a market participant in digital assets.
Objectives and Priorities
The Order takes a holistic view of the potential impact of digital assets to transform our national and global financial system. Accordingly, it identifies the following areas as being of primary concern in reviewing the potential impact of the increasingly widespread adoption of digital assets:
- Protecting consumers, investors, and businesses in the United States.
- Ensuring financial stability and the mitigation of system risk.
- Preventing illicit finance and identifying and mitigating national security risks posed by digital asset adoption.
- Establishing U.S. global leadership in the digital asset space to reinforce American leadership over the global financial system.
- Promoting equitable access to safe and affordable financial services.
- Supporting technological advances to promote the responsible development and use of digital assets in a manner that is mindful of their ability to be illicitly exploited and generated negative externalities such as climate impacts and pollution.
Interagency and Regulatory Coordination
Section 3 of the Order sets out a framework for interagency coordination of findings and proposals. The Assistant to the President for National Security Affairs and the Assistant to the President for Economic Policy are tasked with coordinating implementation of the Order through the executive branch. This involves the inclusion of the Secretary of the Treasury, Secretary of Defense, Attorney General, Secretary of Commerce, Secretary of Labor, Secretary of Energy, Secretary of Homeland Security, Administrator of the Environmental Protection Agency, Director of the Office of Management and Budget, Director of National Intelligence, Director of the Domestic Policy Council, Chari of the Council of Economic Advisers, Director of the Office of Science and Technology Policy, the Administrator of the Office of Information and Regulatory Affairs, Director of the National Science Foundation, and Administrator of the U.S. Agency for International Development.
Additionally, while the Order recognizes the regulatory independence of the Federal Reserve, Consumer Financial Protection Bureau ("CFPB"), Federal Trade Commission ("FTC"), Securities and Exchange Commission ("SEC"), Commodity Futures Trading Commission ("CFTC"), Federal Deposit Insurance Corporation ("FDIC"), and Office of the Comptroller of the Currency, it calls for representation from each of those regulators to weigh in on coordinated findings and proposals where appropriate.
Central Bank Digital Currency
The Order focuses on the centrality of sovereign money to the international financial system and "place[s] the highest urgency" on efforts relating to the research and development of a United States CBDC. Critically, the administration appears to recognize that a U.S. CBDC is a necessary precursor to U.S. leadership in the digital asset space and will enable conversations with our international partners on multi-country CBDC pilot programs.
It directs the Secretary of the Treasury to, within 180 days and in consultation with other relevant agencies, submit to the President a report on the future of money and payment systems, including conditions driving the adoption of digital assets, the extent technological innovation has driven such adoption, and the implications for the U.S. financial system, economic growth, financial inclusion, and national security. In particular, the Order dictates that such a report should include an analysis of the potential implications for economic growth and stability of a U.S. CBDC, the relationship between such a CBDC and private sector administered digital assets, the future of sovereign and privately produced money and the global implications of that future for our political and financial system, and any potential implications such adoption could have on national security or financial crimes.
The Federal Reserve is directed to continue efforts to assess the optimal form a U.S. CBDC might take and to develop a strategic plan for Federal Reserve action on this front in anticipation of the launch of a U.S. CBDC.
The Order also directs the Director of the Office of Science and Technology Policy and the Chief Technology Officer to provide a technical evaluation of the infrastructure, capacity, and expertise necessary to facilitate and support and CBDC system within 180 days.
Finally, the Attorney General is directed to provide an assessment of any necessary legislative changes within 180 days, and a legislative proposal based on that view within 210 days.
The Order’s extensive focus on CBDC, while not unexpected, makes clear that the administration firmly grasps the monumental implications that digital assets have on the entire financial system. We expect the Biden administration’s focus on this issue to sharpen considerably over the next several years as the regulatory framework around digital assets begins to take shape.
Measures to Protect Consumers, Investors, and Businesses
The Order notes that the increased use of digital assets provides increased opportunity for financial crimes such as fraud and theft, and notes that billions of dollars have been lost in the space. In particular, the administration seems focused on the protection of privacy and the unregulated subjection of consumers and investors to unfair business practices and/or a lack of disclosure.
Accordingly, the Order directs the Secretary of the Treasury to submit a report on the implications of digital asset adoptions for consumers, investors, businesses, and equitable economic growth. In addition to policy recommendations and potential regulatory and/or legislative actions, the Order explicitly calls for findings on conditions that might drive the mass adoption of digital assets.
The Attorney General is also directed to submit a report on the role of law enforcement agencies in detecting, investigating, and prosecuting criminal activity related to digital assets. Additionally, the Order encourages the Attorney General to coordinate with the CFPB and FTC on competition policy. This comes on the heels of the Department of Justice’s creation of a Cryptocurrency Task Force assigned to investigate and prosecute such crimes. We expect to see significantly more activity in this space moving forward, as it has clearly become a top priority for federal law enforcement officials.
The CFPB and FTC are also encouraged to coordinate on the consideration of the impact that broad adoption of digital assets could have on consumer protection measures within their respective jurisdictions and the extent to which protections may be necessary.
The Order also encourages the SEC, CFTC, Federal Reserve, and FDIC to consider the extent to which investor and market protection measures already in place within their respective jurisdictions could be used to address the risks associated with digital assets and whether additional regulation might be needed. Given that we have seen these agencies extensively rely upon pre-existing regulatory mechanisms to pursue enforcement of violations relating to digital assets, significant new regulation may not be on the immediate horizon, but we expect to see a spate of new enforcement activity targeted at this space in response to the Order.
Finally, the Order directs the Office of Science and Technology Policy to issue a report within 180 days on the connection between distribute ledger technology and economic and energy transitions in the short, medium, and long term, and the potential for such technologies to impede or advance efforts to address climate change.
Promotion of Financial Integrity, Mitigation of Systemic Risk, and Strengthening of Market Integrity
The Order directs the Secretary of the Treasury to convene the Financial Stability Oversight Council ("FSOC") to assess the financial stability risks and regulatory gaps posed by the increased adoption of digital assets and produce a report on these risks within 210 days.
Actions to Limit Illicit Finance and Associated National Security Risks
The Order is focused on the potential of digital assets to facilitate cybercrimes, finance illicit activities including terrorism and weapons proliferation, enable money laundering, and flout international sanctions regimes. Accordingly, the Order directs the Secretary of the Treasury to develop a coordinating action plan to mitigate digital asset related illicit finance and national security risks identified by the Congress of National Strategy for Combating Terrorist and Other Illicit Financing.
International Cooperation and U.S. Competitiveness
Finally, the Order focuses on the development of a framework to regulate digital assets as an opportunity to bolster U.S. economic competitiveness and establish the U.S. as a leader in the digital asset space. The administration stresses the importance of working with international collectives such as the G7, G20, Financial Stability Board, and Financial Action Task Force in establishing a workable global framework for the adoption and use of digital assets that supports American values such as democracy and the rule of law.
To facilitate this priority, the Secretary of the Treasury is directed to establish a framework for interagency international engagement with foreign counterparts to "adapt, update, and enhance adoption of global principles and standards for how digital assets are used and transacted, and to promote development of digital asset and CBDC technologies consistent with our values and legal requirements." Within one year of the establishment of this framework, the Secretary of the Treasury is to submit a report to the President on priority actions taken under the framework and its effectiveness.
The Secretary of the Commerce is directed to establish a framework for enhancing U.S. competitiveness in, and leveraging of, digital asset technologies.
The Attorney General is further direct to submit a report within 90 days on how to strengthen international law enforcement cooperation on investigating, detecting, and prosecuting criminal activity in the digital asset space.
The incredibly broad scope of the Order sets a clear tone for the Biden administration’s approach to the regulation and development of digital assets. We expect to see an uptick in enforcement actions from financial regulatory authorities against participants in the digital asset space even before the development of any new regulatory or legislative initiatives. Additionally, we expect the DOJ’s Cryptocurrency Task Force to become more active in pursuing prosecutions for financial and other crimes perpetrating with digital assets or in the digital asset space. As always, our team at McGonigle remains committed to closely following these developments and being ready to assist our digital asset and blockchain clients as needed.