On March 9, 2022, President Biden issued an Executive Order entitled “Ensuring Responsible Development of Digital Assets” (the “Order”), concerning the administration’s digital asset policy objectives. The Order is the U.S. government’s first holistic risk analysis of digital assets. While it did not announce any specific regulations, the Order directs federal agencies to investigate the risks cryptocurrency poses to consumers, investors and financial markets and to develop policy solutions to address those issues. In a mere few months, the ordered investigation has seemingly provided research necessary for a bill posed to provide clarity on regulating digital assets.
The Investigation’s Parameters and Related Research
The Order enumerates six main objectives regarding crypto regulation: (1) protecting consumers, investors and businesses; (2) mitigating systemic financial risks; (3) mitigating national security risks; (4) reinforcing U.S. financial leadership; (5) promoting safe and affordable financial services; and (6) supporting technological advances.
- Protect Consumers, Investors, and Businesses: The Order requests that relevant agencies investigate sufficient safeguards are in place to protect consumers’, investors’ and businesses’ data and assets. Also, these agencies will investigate how to maintain privacy and shield against arbitrary or unlawful surveillance.
- Protect Financial Stability and Mitigate Systemic Risks: Individuals and entities that are either creating, issuing and offering cryptocurrency will need to comply with new regulatory and supervisory standards. The Financial Stability Oversight Council is responsible for identifying and mitigating systemic financial risks posed by digital assets and to develop appropriate policy recommendations to address any regulatory gaps.
- Mitigate the Illicit Finance and National Security Risks: The anonymous nature of the blockchain enables a substantial number of illicit dealings such as money laundering, cybercrime, human trafficking and terrorism. Currently, virtual asset service providers, such as Coinbase, have borne the burden of preventing such transactions. The Order requests a collaborative effort amongst U.S. agencies and allies to ensure appropriate controls, regulations, technological measures and international frameworks are aligned and responsive to the risks.
- Promote U.S. Leadership in Technology and Economic Competitiveness: The Department of Commerce is tasked to establish a framework to drive U.S. leadership in setting standards that promote democratic values, the rule of law, privacy, consumer protection and interoperability with digital platforms, among other things. This framework will serve as a foundation for agencies to integrate into their policy, research and development and operational approaches to digital assets.
- Promote Equitable Access to Safe and Affordable Financial Services: The Biden administration aims to promote equitable access to financial services, including by making investments and funds transfers cheaper, faster and safer and by promoting more cost-efficient access to financial products and service, especially for the underserved communities.
- Support Technological Advances: The Order directs relevant agencies to study and support technological advances in the responsible development, design and implementation of digital asset systems while prioritizing privacy and security, combating illicit exploitation and reducing negative climate impacts.
Private companies will also continue to develop solutions to issues identified in the Order. For example, this August we also expect a federal report on the energy practices of cryptocurrency companies. The study aims to explain the environmental impacts of cryptocurrency companies, potentially demanding policy that would force these companies to alter their practices. Ethereum, a major blockchain network, has already taken steps on its own initiative toward perhaps more sustainable operations and is planning a switch to proof-of-stake from a proof-of-work algorithm. The former algorithm has shown to be more secure and energy efficient. This example demonstrates that cryptocurrency companies are already implementing substantive changes to the issues the Order simply identifies as research questions.
Anticipated Securities Regulation of Cryptocurrency
As discussed, the executive order does not provide concrete policy changes. Rather, it orders research that that might guide future policy. Also, it directly acknowledges that existing laws do not adequately contemplate digital assets’ effects on sectors such as consumer safety.
As of earlier this year, the Securities and Exchange Commission (SEC) is investigating the degree to which digital currency should be regulated in the world of more “traditional” financial sectors. Much of this investigation is determining whether the SEC will change its classifications of cryptocurrency and non-fungible tokens (“NFTs”) from commodities securities. Such a change could bring stricter regulations. The anticipation of this switch could affect (and may already have affected) the market, price and value stability of crypto assets.
The executive order certainly points to a move toward greater cryptocurrency regulation. As the first point on the official government fact sheet for this order details a focus on protecting investors, it is not unreasonable to assume that this protection could come at the expense of limiting cryptocurrency companies’ previously nearly unbridled operations. Time will tell whether the federal government will stay true to this focus, in the form of policy changes.
Some senators with a focus on the potential of crypto have already taken steps to introduce regulation into the cryptocurrency space. As of June 7, 2022, Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) introduced the Responsible Financial Innovation Act (the “Bill”), which would prioritize consumer protection, innovation of and integration into current law of what the Senators call “digital assets and blockchain industries”. The Bill calls on multiple federal agencies to cooperatively work towards several goals. Key goals include: universally defining critical digital currency terms, creating an advisory committee to help modernize the applicable law, developing a taxation structure and further investigation on digital asset mining’s effect on the environment.
On face, the potential impact of the Bill is quite similar to the Order in ordering further research and policy development. Like the Order, the Bill demands further research on the environmental impact of cryptocurrencies. Further, it directs multiple federal agencies to propose regulations concerning consumer protection, taxation and securities/commodity classification. But, unlike the Order, the Bill includes specific direction to the Government Accountability Office to investigate China’s digital yuan and provide analyses of potential retirement investment in cryptocurrency. If passed, interested parties will still be holding tight for concrete policy change as the Bill simply directs more policy research and development.
Conclusion
Biden’s Order signals the federal government’s recognition of the growing impact of cryptocurrencies and its commitment to taking leadership in shaping the design of the digital asset ecosystem. Nevertheless, the Order does not address certain fundamental issues in concrete legal terms. Rather, cryptocurrency companies have led the charge towards substantive solutions. As a result, uncertainty remains in the crypto space. Businesses and individuals in the digital asset market should keep monitoring any updates from the government and consult an attorney to navigate regulatory risks and compliance requirements in the United States.
Contributions to this blog by Ru Hochen.
