In a recent article assessing the regulatory horizon for cryptocurrency, Bates identified several areas of uncertainty which raised certain questions. Among them were whether the President would offer the kind of direction that would move federal agencies and legislators toward consensus on regulating the burgeoning crypto-marketplace; whether the resulting framework would encourage the development of—or place strict limitations—on stablecoins; whether proposed legislative solutions would be officially endorsed to empower various agencies with explicit regulatory and enforcement authority over digital assets; and whether the money laundering and national security implications of crypto would be integrated with other supervision within this new framework.
We may now have answers to those questions in the form of an Executive Order and accompanying Fact Sheet on “ensuring responsible development of digital assets,” issued by President Biden on March 9, 2022. Here is a summary of the main points.
The Executive Order
The Executive Order is described by the White House as a set of priorities for a “whole-of-government approach” to manage the risks from digital assets. In other words, it is not a framework itself, but rather a call to action for government agencies to collaborate on policy recommendations for legislation and regulation of the digital asset space. The Order (as clarified in the Fact Sheet) details six core U.S. goals and concerns:
- the protection of U.S. consumers, investors and businesses while promoting equitable economic growth;
- the protection of U.S. financial stability and mitigation of systemic risk;
- the mitigation of illicit finance and national security risks;
- the promotion of U.S. leadership in the global financial system, including the exploration of a U.S. Central Bank Digital Currency (“CBDC”);
- the promotion of equitable access to safe and affordable financial services; and
- the promotion of technological advances while prioritizing “privacy, security, combating illicit exploitation, and reducing negative climate impacts.”
The Executive Order requires collaboration from many administrative agencies on reports, action plans, annexes, and recommendations consistent with these objectives. For example, to protect consumers, investors, and businesses, the Treasury Secretary, the Attorney General, and the White House Director of the Office of Science and Technology Policy et. al. are directed to produce three reports on the implications of digital assets to payment system infrastructures, law enforcement, and on energy and the environment. These reports are due by September 5, 2022.
To promote financial stability and mitigate systemic risks, the Treasury Secretary and the Financial Stability Oversight Council (whose members include the SEC, the OCC, the CFTC, the CFPB and the Federal Reserve Board Chair) must produce a report by October 5, 2022.
To limit illicit financial and national security risks, a host of agencies including Treasury, Homeland Security, Commerce, the Office of Management and Budget, and others must (i) submit an annex to the National Strategy for Combating Terrorist and Other Illicit Financing, (ii) submit a coordinated action plan, and (iii) notify all relevant agencies of legislative proposals or necessary rulemakings.
On the creation of a U.S. CBDC, a similar group was directed to prepare a “Digital Assets Report,” an assessment of the legislative changes that would be necessary, a technical evaluation (all of these by September 5, 2022), and corresponding legislative proposals to be prepared by the Attorney General, the Treasury Secretary, and the Federal Reserve Board Chair by October 5, 2022.
Toward a Comprehensive Framework
The Order encourages independent agencies mostly through the umbrella FSOC to report on digital asset stability risks and regulatory gaps and to deliver recommendations to address such risks. While the Executive Order serves as a high-level list of general priorities, these required submissions serve as a method through which a common framework may emerge. As Bates previously reported, the current regulatory vacuum has led many independent agency regulators (e.g., the SEC) to assert themselves in this area. The Executive Order is an attempt to bring the federal administrators into a “whole of government” approach, but it really applies only to a “whole of the federal government.” It does not address the myriad State legislative initiatives or regulatory oversight rules on money transmitting licensure (see, e.g., New York DFS regulations).
The Executive Order has been positively received. In large measure, that is because it is a very high-level set of unobjectionable goals. It does provide a process that might lead to the kind of direction that market participants have long called for. The fact that the digital asset market has a three trillion-dollar capitalization, as highlighted in the Executive Order, speaks to how behind the curve the United State is in creating a unified framework.
Though it kicks the can down the road by forcing hard compromises at the administrative level, the Executive Order has made clear that cryptocurrencies are here to stay. That is, it has rendered the debate about whether to legitimize them—long the dominant question—moot. Further, it is clear from the Order that a U.S.-issued CBDC is on the way.
As to the many reporting directives, reaching consensus is unlikely to be an easy task, particularly given that many of the agencies charged with the effort (independent or not) have already forged positions mostly by extending their interpretations of their authorities. And this is all before the legislative process even starts. So, for now, there is still little change in the regulatory environment. Bates will continue to keep you apprised.
About Bates MSB and Cryptocurrency Services
Bates Group’s MSB and FinTech practice offers guidance and services for Money Services Businesses and Non-Banking Financial institutions, fintech and cryptocurrency firms. Our crypto subject matter experts work directly with firms and counsel to design and implement policies to ensure they are AML-compliant. Our MSB and AML Teams help obtain and maintain Money Transmitter Licensing, and they also engage clients with BSA/AML/OFAC Program Development, Risk Management, Training, Advisory Services, and Independent Reviews.
For more information, please contact:
Brandi Reynolds, CAMS-Audit, Managing Director, email@example.com | 864-590-8696
Rob Ayers, Consulting Expert, firstname.lastname@example.org | 303-478-2962