White House issues Executive Order directing federal agencies to review regulation of digital assets

President Biden signed an "Executive Order on Ensuring Responsible Development of Digital Assets" on March 9, 2022, that tasked federal agencies with conducting a broad review of digital assets, including cryptocurrencies. The Order lays out a national policy for digital assets focused on six key priorities: (1) consumer and investor protection; (2) financial stability; (3) illicit finance; (4) US leadership in the global financial system and economic competitiveness; (5) financial inclusion; and (6) responsible innovation.

This Executive Order is the first truly coordinated approach that the federal government has sought to take to evaluate and regulate digital assets. It signals the executive branch's understanding that digital assets are here to stay in the financial system and that regulation must balance their utility and potential for innovation against the important and legitimate regulatory needs to protect the public, the financial system, and national security. Until now, federal agencies who have regulated the asset class have largely operated in silos, working independently of one another based on their respective legislative mandates. Some agencies have exercised authority over digital assets using existing regulatory frameworks, while others have left the asset class largely unregulated. Under the Executive Order, the Treasury, Commerce, State, and Justice departments, among other agencies, will be tasked with studying cryptocurrency markets and will have several months to conduct a review and prepare a public report with recommendations.

Specifically, the Executive Order calls for measures to:

Protect US consumers, investors and businesses

The Treasury and other agency partners will assess and develop policy recommendations to address the implications for consumers, investors, businesses, and equitable economic growth. Regulators are asked to ensure sufficient oversight and safeguard against any systemic financial risks.

Protect US and global financial stability and mitigate systemic risk

The Financial Stability Oversight Council is asked to develop policy recommendations and address any regulatory gaps.

Mitigate the illicit finance and national security risks posed by the illicit use of digital assets

The Executive Order directs an unprecedented focus of coordinated action across all relevant US Government agencies and directs those agencies to work with our international allies and partners to ensure that frameworks and capabilities are aligned and responsive to risks. This is especially important for digital assets because of the ease and speed with which they cross borders.

Promote US leadership in technology and economic competitiveness to reinforce US leadership in the global financial system

The Department of Commerce will work with other agencies to establish a framework to drive US competitiveness, leadership in, and leverage of digital assets. As the US Dollar is viewed as the leading reserve currency around the world, this framework seeks to maintain that leadership.

Promote equitable access to safe and affordable financial services

This measure affirms the critical need for safe, affordable, and accessible financial services. The Secretary of the Treasury will work with relevant agencies to produce a report on the future of money and payment systems, which will include the extent to which technological innovation may influence the future of economic growth, financial growth and inclusion, and national security.

Support technological advances and ensure responsible development and use of digital assets

Agencies are asked to study and support technological advances of responsible digital asset systems that prioritize privacy, security, protect against and combat illicit exploitation and reduce negative climate impacts.

Explore a US Central Bank Digital Currency (CBDC)

A CBDC is a digital form of a country's sovereign currency. The Federal Reserve is asked to continue its research, development, and assessment of a US CBDC and it prioritizes international experimentation while also assessing technological infrastructure and capacity needs. Working with international partners is also viewed as a crucial part of the development of systems and policies that are aligned around the globe.

Key takeaways

• The Executive Order is consumer, investor, and business-friendly. It reaffirms that the US will continue to take an interest in protecting these stakeholders. At the same time, the Order is unstinting in assuring that the Government will take action against nefarious parties who use digital assets to enable or promote fraud, crimes, or threats to national security.


• The Executive Order correctly recognizes that enabling truly effective protections regarding digital assets is an international issue, with many broad-reaching implications. Systems, policies and legal frameworks will need to be aligned globally to create safe and efficient markets that are trusted by investors and do not allow fraudsters to elude control by venue shopping where they set up their servers.


• Creators of legitimate digital assets may well have mixed reactions. On the one hand, more regulation could limit innovation, cement existing players' leadership and create more costs as such ventures deal with compliance. On the other hand, the government seeks to create a system that promotes trust and removes illicit tokens. This may allow more capital to flow into the market and end up in the hands of legitimate entrepreneurs who are creating innovative digital assets.


• The traditional banking, wirehouse, and investing system as a whole could potentially face a major overhaul that produces both efficiencies and costs. New products and revenue streams would be legitimized and integrated into the financial system. But these developments would also require adjusting or creating new back-office and front-office systems that meet the compliance and reporting requirements of the regulations and rules that are likely to be developed by agencies and Congress.


• Lastly, regulators and lawmakers are now being charged with the responsibility to take their time and get digital asset regulation right. The financial system is at an important crossroads, and the laws, rules, and regulations that government officials now draft will serve as a foundation for the future. The Executive Order offers a vision in which entrepreneurs who are creating innovative products will be nurtured and embraced, fraudsters will be detected and punished, and national security protected, with flexibility being maintained and appropriate but not stifling controls and compliance measures put in place.

Overall, while the Executive Order signals an acceptance of digital currency and appears to foster innovation, at the same time clients need to be extra diligent regarding compliance and controls in this area as US enforcement agencies will be watching closely.

Thanks to Paul Guirguis, a law clerk in the corporate group of the firm's New York office, for his assistance in drafting this post.

Sources:

https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets/

https://www.whitehouse.gov/briefing-room/statements-releases/2022/03/09/fact-sheet-president-biden-to-sign-executive-order-on-ensuring-responsible-innovation-in-digital-assets/