On March 9, 2022, the Biden Administration released its much-anticipated “Executive Order on Ensuring Responsible Development of Digital Assets” (“Executive Order”). The White House describes the Executive Order as the “first whole-of-government strategy” on digital assets and attempts to strike a balance between encouraging innovation and U.S. leadership in the digital asset space, while signaling an appetite to protect against a variety of stated risks through additional regulation and legislation.
Though novel in its scope and presentation, the substance of the Executive Order comes as no surprise after a series of recent federal actions in the digital asset space. Although the new sanctions and related actions against Russia are top of mind, the recent focus on the role cryptocurrencies and digital assets play in international security is not the only driving force behind the Executive Order.
2021 saw a notable increase in federal regulatory activity regarding cryptocurrencies, stablecoins, and digital assets. In November 2021, the President’s Working Group released its “Report on Stablecoins.” The Report on Stablecoins was followed by a flurry of activity in Congress, including hearings by the Senate Committee on Banking, Housing, and Urban Affairs and the release of a set of principles by Sen. Pat Toomey to guide future legislation on stablecoins. In June 2021, the House Committee on Financial Services also organized a Digital Assets Working Group. Federal regulators also increased the frequency and scope of their investigations and enforcement actions in 2021, including actions by the SEC, Commodity Futures Trading Commission (“CFTC”), and the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of the Treasury (“Treasury”).
The federal activity related to digital assets has only amplified in 2022. For example, on January 14, 2022, the Federal Reserve Board issued its long-awaited central bank digital currency report entitled, “Money and Payments: The U.S. Dollar in the Age of Digital Transformation.” Additionally, on February 4, 2022, the Treasury issued a report entitled, “Study of the Facilitation of Money Laundering and Terror Finance Through the Trade in Works of Art,” which focuses, in part, on the emerging digital art and nonfungible token (“NFT”) markets. Against this backdrop of federal activity, the Executive Order, which was originally scheduled to be released late last year, should hopefully provide much needed organization and direction across agencies and regulators.
The Executive Order’s Stated Objectives
The Executive Order and the accompanying Fact Sheet spend a significant amount of text discussing the Biden Administration’s objectives with respect to its policy position and directives on digital assets. As the actual directives of the Executive Order consist almost entirely of the commissioning of new reports (discussed below), understanding the Administration’s stated objectives provides the main avenue to analyze the Administration’s current policy position on digital assets. At a high level, the Administration’s stated intentions, repeated throughout the Executive Order and the Fact Sheet, are to:
- protect consumers, investors, and businesses in the United States;
- protect United States and global financial stability and mitigate systemic risk;
- mitigate the illicit finance and national security risks posed by misuse of digital assets;
- reinforce United States leadership in the global financial system and in technological and economic competitiveness, including through the responsible development of payment innovations and digital assets;
- promote access to safe and affordable financial services;
- support technological advances that promote responsible development and use of digital assets; and
- explore a U.S. Central Bank Digital Currency (“CBDC”).
The Executive Order’s stated objectives highlight the tension between the federal government’s role in advancing digital asset technology to maintain U.S. dominance in the global economy and regulating such novel economic products and markets to protect consumers, business, and the environment. This central tension is at the heart of nearly every regulatory conversation related to digital assets, and the Executive Order seemingly attempts to strike a neutral position. The Administration touts the “opportunity to reinforce American leadership in the global financial system and at the technological frontier,” while in the same sentence it mentions the “substantial implications for consumer protection, financial stability, national security, and climate risk.” The Executive Order notes the importance of playing a leading role internationally in the development of CBDCs and the international governance of digital assets to ensure their design is “consistent with democratic values and U.S. global competitiveness.”
Policy Positions and Directives in the Executive Order
The Executive Order is light on official statements of policy and focuses more on issuing a number of directives across five categories to further the “whole-of-government” approach to U.S. policy on digital assets. Notably, the only categories that include a formal statement on the Biden Administration’s policy relate to the development of a U.S. CBDC and the opportunities and risks associated with international cooperation and maintaining U.S. competitiveness internationally. Apart from those more robust discussions, the remaining three categories include somewhat brief statements related to the Executive Order’s objectives followed by specific directives to produce enumerated reports and other deliverables. Although it is difficult to predict the priorities of the Administration and the federal government, the Executive Order’s focus on the innovation of a U.S. CBDC and the resulting importance of managing the outcomes associated with trading digital assets internationally may signal more regulatory focus on digital asset technology than the markets expected.
1. Policy and Actions Related to U.S. CBDC
Appearing first in the Executive Order, the discussion of a U.S. CBDC is the most detailed and specific. The Biden Administration asserts an explicit policy position on a U.S. CBDC, which includes placing the “highest urgency” on research and development efforts into the potential design and deployment options of a U.S. CBDC. The Administration’s policy position demonstrates an eagerness to exert influence in the international development of CBDCs to showcase U.S. leadership in the international pilot projects related to CBDCs. The Executive Order also specifically acknowledges the potential of a CBDC to support more efficient and lower cost transactions, and specifically cross-border transactions, and recognizes the importance of developing a U.S. CBDC that is interoperable with CBDCs issued by other sovereign monetary authorities. The Executive Order makes clear that developing a U.S. CBDC is its top priority, stating that the federal government should “prioritize timely assessments” of the benefits and risks under a variety of U.S. CBDC designs.
Specifically, the Executive Order calls for “a report on the future of money and payment systems” by September 5, 2022, coordinated by a variety of federal offices and agencies. The report must include a discussion of (1) the conditions that drive broad adoption of digital assets; (2) the extent to which technological innovation may influence these outcomes; and (3) the implications for the United States financial system, the modernization of and changes to payment systems, economic growth, financial inclusion, and national security. Specifically, the Executive Order requires that this report on the future of money include an analysis of:
- the potential implications of a United States CBDC, based on the possible design choices, for national interests, including implications for economic growth and stability;
- the potential implications a United States CBDC might have on financial inclusion;
- the potential relationship between a CBDC and private sector-administered digital assets;
- the future of sovereign and privately produced money globally and implications for our financial system and democracy;
- the extent to which foreign CBDCs could displace existing currencies and alter the payment system in ways that could undermine United States financial centrality;
- the potential implications for national security and financial crime, including an analysis of illicit financing risks, sanctions risks, other law enforcement and national security interests, and implications for human rights; and
- an assessment of the effects that the growth of foreign CBDCs may have on United States interests generally.
Although not directed to produce a specific report, the Chairman of the Board of Governors of the Federal Reserve System (“Chairman of the Federal Reserve”) is encouraged to continue to, among other things, research and report on the extent to which CBDCs could improve the efficiency and reduce the costs of existing and future payments systems.
Further emphasizing the importance of the issue, the Executive Order directs the Attorney General, in consultation with the Secretary of the Treasury and the Chairman of the Federal Reserve, to (1) issue a report by September 5, 2022, assessing whether legislative changes would be necessary to implement a U.S. CBDC and (2) issue a corresponding legislative proposal by October 5, 2022, based on the findings of the report on the future of money.
2. Measures to Protect Consumers, Investors, and Businesses
After briefly discussing the risks of various crimes, including fraud, theft, data breaches, and other negative outcomes faces by consumers of, investors in, and businesses related to digital assets, the Executive Order directs the production of a variety of deliverables by September 5, 2022, including:
- a report (or section of the report on the future of money) by a variety of federal offices and agencies on the implications of developments and adoption of digital assets on consumers, investors, and businesses and for equitable economic growth, including discussion of the conditions that would drive, and the risks and opportunities associated with, mass adoption of digital assets and related policy recommendations;
- a technical evaluation by a variety of federal offices and agencies of the technological infrastructure, capacity, and expertise that would be necessary at relevant agencies to facilitate and support the introduction of a CBDC system should one be proposed;
- a report by a variety of federal offices and agencies on the role of law enforcement agencies in detecting, investigating, and prosecuting criminal activity related to digital assets; and
- a report by a variety of federal offices and agencies focused on the impacts of distributed ledger technology on the environment and its impact on climate change, which report must be updated within a year of its submission to address any knowledge gaps identified in the report.
Additionally, a variety of federal agencies are encouraged to consider topics ranging from the impact of the growth of digital assets on competition policy to focus on consumer protection and other market protection measures.
3. Actions to Promote Financial Stability, Mitigate Systemic Risk, and Strengthen Market Integrity
The briefest of the topics covered, this section on stability and systemic risk focuses on the oversight responsibilities of a variety of federal regulators with respect to digital assets, including the SEC, CFTC, CFPB, and federal banking agencies. By October 5, 2022, the Secretary of the Treasury must convene the Financial Stability Oversight Council (“FSOC) and produce a report (i) outlining the specific financial stability risks and regulatory gaps posed by various types of digital assets and (ii) providing recommendations to address such risks. The Executive Order requests that this new report leverage the work already completed by FSOC and other federal agencies in developing its findings and recommendations.
4. Actions to Limit Illicit Finance and Associated National Security Risks
This section of the Executive Order focuses on the role digital assets play in cybercrime, ransomware activity, money laundering, financing of terrorism, fraud and theft schemes, and corruption. The Administration makes clear that, while focused on innovation and leadership, it will take appropriate measures to mitigate the associated criminal activity connected with digital assets. Rather than trigger the production of deliverables called for in this section to the release of the Executive Order, the timing of the various directives depends on the production of other reports related to the underlying areas of criminal activity more generally. Such required analysis includes: (i) offering additional views on illicit finance risks posed by digital assets and trends in the use of digital assets by illicit actors; (ii) developing a coordinated action plan based on the conclusions in the report entitled, “National Strategy for Combating Terrorist and Other Illicit Financing,” for mitigating the digital‑asset-related illicit finance and national security risks addressed in the updated strategy; and (iii) notifying all relevant agencies of any pending, proposed, or prospective rulemakings to address digital asset illicit finance risks. This approach to addressing criminal activity associated with digital assets signals a desire to work within existing enforcement agencies rather than constitute a new enforcement body focused on digital assets.
5. Policy and Actions Related to Fostering International Cooperation and United States Competitiveness
Finally, the Executive Order sets forth its policy positions on fostering international cooperation and U.S. competitiveness with respect to digital assets and financial innovation. The Administration highlights the negative impacts of inconsistent international regulation of financial markets across jurisdictions, particularly the potential for arbitrage, weakened consumer protection, and increased overseas illicit activity. After touting the U.S.’s role as President of the Financial Action Task Force (“FATF”) and its role in developing the first international standards on digital assets, the Executive Order emphasizes the importance of continued international cooperation to develop interoperable digital payment architectures and CBDCs efficiently and in accordance with U.S. values and laws. The Executive Order also briefly discusses the G7 Digital Payments Experts Group and the report produced by the US-led group. The Administration emphasizes the importance of setting international standards for the regulation and supervision of digital assets for anti‑money laundering and countering the financing of terrorism (AML/CFT) as a key aspect of international cooperation. The Executive Order pronounces the Administration’s commitment to, “seek to ensure that our core democratic values are respected; consumers, investors, and businesses are protected; appropriate global financial system connectivity and platform and architecture interoperability are preserved; and the safety and soundness of the global financial system and international monetary system are maintained.”
The deliverable associated with this policy statement include, by July 7, 2022, establishing a framework for interagency international engagement with foreign counterparts to (1) adapt, update, and enhance adoption of global principles and standards for how digital assets are used and transacted and (2) promote development of digital asset and CBDC technologies consistent with the United States’ values and legal requirements. Subsequently, within a year of the publication of that framework, various federal offices and agencies must submit a report to the President on priority actions taken under the framework and its effectiveness. Additionally, by September 5, 2022, the Secretary of Commerce, in consultation with the Secretary of State, the Secretary of the Treasury, and the heads of other relevant agencies, must establish a framework for enhancing United States economic competitiveness in, and leveraging of, digital asset technologies. Further, by June 7, 2022, the Attorney General, in consultation with the Secretary of State, the Secretary of the Treasury, and the Secretary of Homeland Security, must submit a report to the President on how to strengthen international law enforcement cooperation for detecting, investigating, and prosecuting criminal activity related to digital assets.
The ultimate impact of the Executive Order remains to be seen as the variety of workstreams in progress under its direction are drafted and presented over the coming year. Broadly, the reaction to the Executive Order appears positive in both the private and public sectors. The official statement by Treasury Secretary, Janet Yellen, applauded the Executive Order’s approach to “responsible innovation” and reiterated Treasury’s commitment to fulfill its obligations and complete the “important work” directed by the Executive Order. Whether the Administration’s objectives will materialize into discernable action will be revealed over time. Despite the implicit enthusiasm in the Executive Order for developing a U.S. CBDC, the road to achieving such a feat will be long and complex. In the moments after the Biden Administration released the Executive Order, the Federal Reserve’s official twitter account released a statement that it has not made a decision on whether to pursue or implement a CBDC and encouraged feedback on the range of CBDC-related topics included in its January 2022 discussion paper discussed above.