Biden administration orders digital asset review Fin Tech

On March 9, 2022, President Biden issued an executive order on the “responsible development of digital assets”. He led a “whole-of-government” review of cryptocurrency assets, including directing the Secretary of the Treasury to convene the Financial Stability Oversight Council (“FSOC”), which, in conjunction with other agencies, will study the risks and impact of digital assets and explore the possibility of creating a central bank digital currency (“CBDC”) in the United States.

CBDCs are digital versions of traditional currency issued by a sovereign state. Biden’s proposal essentially asks executive agencies to explore creating a digital version of the US dollar that could be used to facilitate digital transactions while being controlled by the US Treasury Department. Like cryptocurrencies, CBDCs can be used for digital transactions in electronic tokens using public/private key pairs, although other structures are also being considered.1

However, CBDCs are not cryptocurrencies and there are significant differences. Rather than relying on distributed ledgers using cryptography, CBDCs are controlled by the issuing sovereign.2 To date, nine countries have launched CBDCs, although several more are in the research and development phase.3

In issuing the executive order, President Biden expressed concern about the impact of cryptocurrencies on “the integrity of the financial system…crime and illicit finance, national security, the ability to exercise rights rights; financial inclusion and equity; and climate change and pollution”.4 The executive order is, at least in part, motivated by fears that bad actors could use cryptocurrencies to circumvent domestic and foreign financial sanctions as well as anti-money laundering laws.5

The U.S. government must now explore ways to:

  • protect consumers, investors and businesses that transact digital assets;

  • protect US and global financial stability and mitigate systemic risk;

  • mitigate the illicit finance and national security risks posed by the misuse of digital assets;

  • strengthen the competitiveness and economic and technological leadership of the United States in the global financial system;

  • promote access to safe and affordable financial services; and

  • support technological advances that promote the responsible development and use of digital assets.6

The executive order directs the FSOC to submit a report to Congress by October this year, with additional comments to be submitted by thirteen cabinet members as well as various heads of relevant agencies by January 2023.7 The Secretary of the Treasury will then submit a proposed action plan by February 2023, and government agencies are expected to receive notice of new regulations by May next year. However, it is possible that the proposed draft rules will be available for public comment sooner.

The proposed review is striking in its inclusion of agencies with jurisdictions beyond financial services, although the Treasury and Commerce Departments feature prominently. The inclusion of the Department of State acknowledges the potentially global impact of any proposed rule, while the inclusion of the Department of Homeland Security signals national security concerns. The inclusion of the Department of Energy and the EPA reflects a recognition of the potentially significant environmental impacts of using digital assets that rely heavily on multiple computers racing to solve complex cryptographic calculations.

This is a bipartisan issue and follows efforts by the previous administration to begin regulating digital assets, particularly with respect to anti-money laundering.8 The current administration renewed its focus on digital assets last fall. In October, the Justice Department and the FBI each created special task forces to investigate and prosecute criminal activity involving cryptocurrencies.9 Last January, the Federal Reserve Board released a discussion paper on the pros and cons of creating a CBDC.ten The report stressed the importance of “broad support from key stakeholders”, which was echoed in last week’s executive order.

Going forward, we expect new guidance regarding cryptocurrency regulation, although significant rule changes will likely only come after extended review with opportunities for comment from multiple government agencies as well as members of the audience. On the other hand, we expect to see an immediate increased focus on digital assets in enforcement activities enforcing existing anti-fraud and anti-money laundering rules, as well as aggressive enforcement of US sanctions, in particular against Russian entities and individuals.

Footnotes

1 Raphael Auer and Rainer Boehme, Retail central bank digital currency technologyBIS Quarterly Review, p. 93-94 (March 2020), available at https://www.bis.org/publ/qtrpdf/r_qt2003j.pdf.

2 Identifier. at 87 years old.

3 Atlantic Council CBDC Tracking, available at https://www.atlanticcouncil.org/cbdctracker/.

4 Executive Order on ensuring responsible development of digital assetsJoseph R. Biden, Jr. § 1 (March 9, 2022), available oneyou https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets/(“Executive Order”).

5 View Executive Order § 2(c).

6 Executive Decree § 2.

7 Executive Decree § 4(b).

8 Federal Register, Notice of Proposed Rulemaking: Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital AssetsFinCEN (December 23, 2020),
available at https://www.federalregister.gov/documents/2020/12/23/2020-28437/requirements-for-certain-transactions-involving-convertible-virtual-currency-or-digital-assets.

9Sarah Lynch and Chris Prentice, FBI to Form Digital Currency Unit, Justice Department Brings in New Crypto CzarREUTERS (February 17, 2022) available at https://www.Reuters.com/technology/fbi-form-new-digital-currency-unit-justice-dept-taps-new-crypto-czar-2022-02-17/.

10 White Paper, Currency and Payments: The US Dollar in the Age of Digital TransformationFederal Reserve Board of Governors (January 2022), available at https://www.federalreserve.gov/publications/files/money-and-payments-20220120.pdf;
see also Press release, The Federal Reserve Board releases a discussion paper that examines the pros and cons of a possible US central bank digital currency (CBDC)(January 20, 2022),
available at https://www.federalreserve.gov/newsevents/pressreleases/other20220120a.htm.

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Sylvia B. Polson