On January 27, 2023, the Biden Administration published a blog post titled “The Administration’s Roadmap to Mitigate Cryptocurrencies’ Risks”. The roadmap is not a detailed plan nor an update on the previously issued Executive Order of March 9, 2022 that set the Administration’s policy objectives on digital assets (that we discussed in a previous post). However, it underlines that the work commenced almost one year ago to develop the framework outlined in the Executive Order continues to evolve as current events shape the Administration’s thinking about necessary next steps.
The statement is a succinct reflection on the risks brought to light by the recent turmoil in the crypto-assets space followed by clear demands on Congress to addressed certain perceived regulatory deficiencies the Administration associates with recent events. Most notably, the Administration calls for Congress to:
- take action to expand regulators’ powers to prevent misuses of customers’ assets, mitigate conflicts of interest and increase transparency requirements for cryptocurrency companies in order to safeguard investors;
- support enforcement activities by strengthening penalties for violating illicit finance rules, create effective bans for entities financing criminal activities and funding greater law-enforcement capacity building; and
- steer away from legislative action that would threaten to weaken the boundaries between the traditional financial system and the crypto asset space by greenlighting mainstream institutions, like pension funds, to “dive headlong into cryptocurrency markets”.
The guidance for Congress is followed by a statement of support for responsible technological innovations with “commensurate safeguards.” The Administration claims to be working towards this goal by driving forward the digital assets framework it developed and working with Congress.
While the Administration urges Congress to expand regulators’ powers, it still does not echo the call heard throughout much of the private sector that there is an urgent need for the government to articulate a clear framework for governing crypto asset categories and more clearly distinguishing the jurisdictional authorities of the relevant federal regulators, whether banking regulators, the SEC or the CFTC.
The reference to addressing the risk of contagion for the broader financial system by preventing traditional regulated entities to get significantly exposed to crypto-assets seems to second the direction taken by three US bank regulator (the OCC, the FDIC and the Federal Reserve), that recently issued a joint statement (a) requesting that that any banking institution planning to undertake crypto-assets related activities notify the relevant bank regulator of the proposed activities and seek a no objection by such regulator before engaging in any such activities and (b) establishing that issuing or holding (as principal) crypto-assets that are issued, stored or transferred on an open, public and/or decentralized network as principal is highly likely to be inconsistent with safe and sound banking practices. One of these regulators, the Board of Governors of the Federal Reserve, also took a step further in a policy statement issued on January 27, 2023 by declaring that it would presumptively prohibit state banks that are members of the Federal Reserve System from holding most crypto-assets, including Bitcoin and Ether, as principal in any amount and adding that the Board generally believes that issuing decentralized tokens is highly likely to be inconsistent with safe and sound banking practices.
Given the Administration’s continued calls for aggressive enforcement in the absence of clear regulatory distinctions, the public will remain focused on Congressional proposals and indications that particular solutions and frameworks are gaining momentum. It remains to be seen whether or how Congress will factor the Administration’s views into its forthcoming legislative plans, but in the light of market turmoil, Congress cannot wait much longer before taking action.
