President Biden Signs Executive Order, Signaling the Development of a United States Central Bank Digital Currency and Shaping Up Regulations of Digital Assets
On March 9, 2022, President Joe Biden signed the Executive Order on Ensuring Responsible Development of Digital Assets, bringing the U.S. Government one step closer to regulating cryptocurrencies1 and digital assets2 at the federal level and international stage.
Historically, the regulatory oversight of digital assets and cryptocurrencies has been arbitrary, nonexistent, or inconsistent, at best.
Take for example the U.S. Securities Exchange Commission’s (SEC) current lawsuit against CEO Brad Garlinghouse and Chairman Christian Larsen of Ripple, the digital payment network supporting the digital asset XRP. The SEC has brought individual claims against Garlinghouse and Larsen for, among other things, their alleged aiding and abetting of Ripple’s purported unregistered distribution of billions of dollars worth of XRP. Garlinghouse and Larsen adamantly defend that the SEC has failed to, among other things, establish that XRP is in fact a security.
Likewise, regulatory entities have overtly dissuaded investors from investing in cryptocurrencies and digital assets. Just last week, the Department of Labor’s (DOL) Employee Benefits Security Administration published its concerns that cryptocurrencies can purportedly present serious risks to retirement savings such as 401(k) retirement accounts, given various concerns such as valuation, volatility, and the evolving regulatory landscape.
However, the evolving regulatory landscape may soon finally gain the structure and oversight that consumers, investors, businesses, and the decentralized crypto asset market have long sought with respect to consistent regulation, adequate protections of digital assets, and the potential for lucrative returns on investments.
In particular, the Executive Order calls for the Assistant to the President for National Security Affairs (APNSA) and the Assistant to the President for Economic Policy (APEP) to effectuate the goals of the Executive Order and coordinate the efforts of various government agencies and entities, who have been called on to focus on the following areas and accomplish the following tasks within the next year.
Policy and Actions Related to United States Central Bank Digital Currencies.
The Executive Order places significant urgency on contemplating the potential designs and deployment options of a United States central bank digital currency (CBDC)3. The Executive Order calls for government entities, including the Secretary of State and the Secretary of Commerce, to collaborate and submit a report on the future of money and payment systems, including analyses dedicated to the following:
- 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.
The Executive Order also calls for the Attorney General, in conjunction with the Secretary of the Treasury and the Chairman of the Federal Reserve, to perform and submit an assessment of whether legislative changes would be necessary and appropriate to issue a United States CBDC.
Measures to Protect Consumers, Investors, and Businesses
The Executive Order calls for a number of government agencies, including the SEC, to submit a report through an interagency process on the following areas:
- the implications of developing and adopting digital assets and changes in financial market and payment system infrastructures for United States investors and businesses;
- conditions that would drive mass adoption of different types of digital assets and the risks and opportunities such growth might present to United States consumers, investors, and businesses;
- the role of law enforcement agencies in detecting, investigating, and prosecuting criminal activity related to digital assets;
- consider what, if any, effects the growth of digital assets could have on competition policy;
- the extent to which privacy or consumer protection measures within their respective jurisdictions may be used to protect users of digital assets and whether additional measures may be needed;
- the extent to which investor and market protection measures within their respective jurisdictions may be used to address the risks of digital assets and whether additional measures may be needed; and
- the connections between distributed ledger technology and requisite economic and energy transitions.
Actions to Promote Financial Stability, Mitigate Systemic Risk, and Strengthen Market Integrity
The report calls for the Department of Treasury and the Financial Stability Oversight Council (FSOC) to determine the financial stability and inherent risks of the adoption of digital assets. In particular, the Department of Treasury and FSOC have been ordered to submit a report on the myriad of existing digital assets, financial stability risks posed by these digital assets, and proposals for legislation and additions or amendments to existing regulations.
Actions to Limit Illicit Finance and Associated National Security Risks
The Executive Order asserts that digital assets have been increasingly utilized in facilitating nefarious activities including sophisticated cybercrime related financial networks, money laundering, and corruption. In an effort combat such criminal and fraudulent activities, the Executive Order directs a number of government entities, including the Secretary of Commerce and the Director of National Intelligence Department, to:
- provide insight on illicit finance risks posed by digital assets, including cryptocurrencies, stablecoins4, and CBDCs; and
- develop a coordinated action plan to address the role of law enforcement, mitigate digital asset-related illicit finance and national security risks, and measures to increase financial services providers’ compliance with anti money laundering and countering the financing of terrorism (AML/CFT) obligations related to digital asset activities.
Policy and Actions Related to Fostering International Cooperation and United States Competitiveness
The Executive Order cites that cooperation between domestic and foreign government agencies and regulators is imperative to maintain consistent regulatory standards. The Executive Order calls for the U.S. Government to accomplish the following:
- establish a framework for interagency international engagement with foreign counterparts;
- adapt, update, and enhance adoption of global principles and standards for how digital assets are used and transacted;
- promote the development of digital asset and CBDC technologies consistent with United States values and legal requirements;
- promote international principles, standards, and best practices;
- establish a framework for enhancing United States economic competitiveness in, and leveraging of, digital asset technologies; and
- 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 immediacy of the above should signal to investors and businesses alike that cryptocurrencies and digital assets have become ripe for long-term investments and, consequently, imminent regulation.
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1 The Executive Order defines “cryptocurrencies” as “a digital asset, which may be a medium of exchange, for which generation or ownership records are supported through a distributed ledger technology that relies on cryptography, such as a blockchain and digital assets.”
2 The Executive Order defines the term “digital assets” as all central bank digital currencies (CBDCs), “regardless of the technology used, and to other representations of value, financial assets and instruments, or claims that are used to make payments or investments, or to transmit or exchange funds or the equivalent thereof, that are issued or represented in digital form through the use of distributed ledger technology. For example, digital assets include cryptocurrencies, stablecoins and CBDCs. Regardless of the label used, a digital asset may be, among other things, a security, a commodity, a derivative, or other financial product. Digital assets may be exchanged across digital asset trading platforms, including centralized and decentralized finance platforms, or through peer-to-peer technologies.”
3 The Executive Order defines the term “central bank digital currency” or “CBDC” as “a form of digital money or monetary value, denominated in the national unit of account, that is a direct liability of the central bank.”
4 The Executive Order defines “stablecoins” as “a category of cryptocurrencies with mechanisms that are aimed at maintaining a stable value, such as by pegging the value of the coin to a specific currency, asset, or pool of assets or by algorithmically controlling supply in response to changes in demand in order to stabilize value.”