Biden Administration Sets the Stage for Review of Digital Assets

On March 9, 2022, President Biden issued an Executive Order on Ensuring Responsible Development of Digital Assets.  The Executive Order sets forth a detailed roadmap directing relevant government agencies to produce reports on specific aspects of the Administration’s key policy objectives.

The policy objectives identified in the Executive Order are:

1. Protecting U.S. consumers, investors and businesses from financial risks relating to customer arrangements involving digital assets as well as inadequate disclosures of risks associated with investments in digital assets.
2. Protecting U.S. and global financial stability and mitigating systemic risk.
3. Mitigating illicit finance and national security risks.
4. Reinforcing U.S. leadership in the global financial system and in technological and economic competitiveness, including through the responsible development of payment innovations and digital assets.
5. Promoting access to safe and affordable financial services.
6. Supporting technological advances that promote responsible development and use of digital assets and ensuring that digital asset infrastructures are developed, designed, and implemented responsibly.
7. Exploring a U.S. CBDC, in line with the recent Federal Reserve’s paper on a potential U.S. Central Bank Digital Currency (CBDC) that we discussed in a previous post.

With an apparent eye to accelerating a consolidated framework for regulating digital assets, the Order requires a cross-section of U.S. federal agencies to submit reports on specific aspects of digital assets and their design, deployment and regulation. Those include the Departments of Treasury, State, Defense, the Attorney General, the Director of National Intelligence, the Director of the Office of Science and Technology Policy and representatives of certain federal regulatory agencies, including the Federal Reserve, the CFTC, the SEC and the FTC. The timeline for submitting the required reports is between three and seven months from the date of the Executive Order.

CBDC. The Order focuses extensively on the policy and analysis of a potential Central Bank Digital Currency. Reports to be submitted by the relevant agencies on this subject range from technical analysis to legislative proposals.  For example:

• The Secretary of Treasury, in consultation with other agencies, shall provide an analysis of the potential implications of a U.S. CBDC for national interests and on financial inclusion; the potential relationship between a CBDC and private sector-administered digital assets; the future of sovereign and privately produced money globally; the relationship with existing currencies and payment systems; the potential implications for national security and financial crime; and an assessment of the effects that the growth of foreign CBDCs may have on United States interests generally.
• The Attorney General shall provide an assessment of whether legislative changes would be necessary to issue a U.S. CBDC and, if so, a legislative proposal.
• The Board of Governors of the Federal Reserve shall research and report on the prospects for CBDCs to “improve efficiency and reduce the costs of existing and future payment systems,” and develop a strategic plan for the potential implementation and launch of a U.S. CBDC.
• The Director of the Office of Science and Technology Policy shall submit a technical evaluation of the technological infrastructure, capacity, and expertise that would be necessary to facilitate and support the introduction of a CBDC system.

Consumer and Market Protection. The Order also requires further analysis of digital assets with respect to consumer and market protection. Among other things, it specifically requires:

• The Treasury, in consultation with others, to submit a report on the implications of developments and adoption of digital assets and changes in the financial market and payment system infrastructure, including policy recommendations to protect consumers, investors, and businesses.
• The Attorney General, in consultation with others, to submit a report on the role of law enforcement agencies in detecting, investigating, and prosecuting criminal activity related to digital assets.
• The FTC and CFPB to “consider” digital assets in the context of privacy and competition policy.
• The SEC, CFTC, Federal Reserve, FDIC, and OCC are also “encouraged to consider the extent to which investor and market protection measures within their respective jurisdictions” can address digital asset risk.

Stability and Systemic Risk. The Order also focuses on financial stability and systemic risk. In particular, the Financial Stability Oversight Council shall produce a report outlining the financial stability risks and regulatory gaps posed by various types of digital assets and providing recommendations to address such risks.

Illicit Finance and Associated National Security Risks. In addition, the Order seeks to address cybercrime and other illicit uses of digital assets. It does so by requiring that:

• Treasury, in conjunction with a range of other agencies, submit supplemental annexes to the National Strategy for Combating Terrorist and Other Illicit Financing submission to Congress to amplify views on illicit finance risks posed by digital assets.
• Treasury and the same agencies should develop a coordinated action plan for mitigating such risks.
• Treasury “notify the relevant agencies” on pending, proposed, or prospective rulemakings to address digital asset illicit finance risks within a designated time of the completion of various illicit finance related assessments.

Finally, the Order recommends a range of steps relating to international cooperation.

Taken together, the Order outlines a vast array of reporting and review requirements to be taken forward by agencies. But while the Order articulates a general policy direction, it seeks only feedback on critical open issues, resolving none. The Order also leaves open the key regulatory and policy questions that many predicted the Order would address. Particularly notable in that regard is the Order’s statement that each of the SEC, the CFTC, the Fed, FDIC and the OCC are “encouraged to consider the extent to which investor and market protection measures within their respective jurisdictions may be used to address the risks of digital assets.” The Order provides no additional guidance as to how different digital assets should be classified nor, for that matter, which agency should oversee which products / platforms. This is notwithstanding that one of the most significant market concerns has been the lack of clarity around the scope of these regulators’ authority over digital assets. The Order’s blithe encouragement to the agencies that they should continue to wield the same blunt market protection tools to confront the new risks posed by digital assets thus leaves undisturbed the open-ended regulatory opacity that many have been urging Congress and the Executive Branch to clarify.

The Order does initiate a complex web of interagency actions from which more definitive Executive Branch direction may result. In the meantime, Congress retains the power to set that direction itself, and as months continue to pass with ambiguous federal positions on digital assets, pressure may indeed build for Congress to do just that.