March 9, 2022

Biden’s Executive Order On Crypto Is Out — Read TRM’s Quick Take

TRM Takes:

The Order focuses on the growth of the crypto economy and the need for U.S. technological leadership
The Order places “urgency” on research and development of a CBDC
Illicit finance and national security risks are a continued focus as Order directs interagency and international coordination
Treasury to focus on financial inclusion
The Order directs agencies to address regulatory gaps for potential systemic and consumer protection risks
Lots of work to do as agencies study and build a regulatory framework

Moments ago, President Biden signed a long-awaited crypto executive order on “Ensuring Responsible Innovation in Digital Assets (Order),” and issued this fact sheet. While regulatory agencies have been providing crypto-related guidance and taking enforcement actions for years, the White House, with this executive order, intends to outline “the first ever, whole-of-government approach to addressing the risks and harnessing the potential benefits of digital assets and their underlying technology.” The Order sets forth a national policy for cryptocurrency across “six key priorities: consumer and investor protection; financial stability; illicit finance; U.S. leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation.”

What are the key takeaways?

The Order focuses on the growth of the crypto economy and the need for U.S. technological leadership

While there is inevitable discussion of the risks associated with cryptocurrency — illicit finance, consumer and investor protection, climate and financial stability — a fair amount of the Order is devoted to the growing crypto economy and the need for America to lead and invest in new technology. The accompanying fact sheet begins, “Digital assets, including cryptocurrencies, have seen explosive growth in recent years . . . The rise in digital assets creates an opportunity to reinforce American leadership in the global financial system and at the technological frontier.”

In fact, the Order, at times, reads like a call to the digital space race:

“The United States must maintain technological leadership in this rapidly growing space, supporting innovation while mitigating the risks for consumers, businesses, the broader financial system, and the climate. And, it must play a leading role in international engagement and global governance of digital assets consistent with democratic values and U.S. global competitiveness.”

The Order specifically directs the Department of Commerce to establish a framework to drive U.S. competitiveness and leadership in the digital asset space.

The Order places “urgency” on research and development of a CBDC

In January the Federal Reserve published a 41-page paper on the pros and cons of a potential central bank digital currency (CBDC). The Order, however, seems to go a step further “placing urgency on research and development” of a CBDC. While, The Fed paper states that the national bank does not plan to issue a CBDC “without clear support from the executive branch and from Congress,” the Order could be just the support needed to move forward. The Order “directs the U.S. government to assess the technological infrastructure and capacity needs for a potential CBDC . . . and encourages the Federal Reserve to continue its research, development, and assessment efforts for a U.S. CBDC.”

In addition, the White House focuses on international partnerships and calls for “U.S. leadership internationally to promote CBDC development that is consistent with U.S. priorities and democratic values.” This line is important as China — and its digital yuan — is far ahead of the U.S. in development of its CBDC. Promoting a CBDC alternative to the yuan — which has been criticized as a potential surveillance tool for the Chinese government — is clearly a focus of the administration from a national security and American competitiveness perspective.

Illicit finance and national security risks are continued focus

Regulators and law enforcement have been focused for some time on mitigating the illicit finance risks in cryptocurrency. We have seen a number of significant Financial Crimes Enforcement Network (FinCEN) enforcement actions) for violations of the bank secrecy act. We have seen the Office of Foreign Assets Control (OFAC) bring sanctions against two Russia-based cryptocurrency exchanges and issue comprehensive guidance to crypto-businesses to ensure sanctions compliance. We have seen the U.S. Department of Justice (DOJ) indict darknet mixing services for money laundering conspiracy. And, just a few weeks ago we saw the arrests of two individuals, and the largest seizure in U.S. history, in an investigation into the 2016 hack of cryptocurrency exchange Bitfinex.

The Order directs an “unprecedented focus” on coordinated action across all relevant agencies and with international partners. While we have already seen a lot of law enforcement coordination on crypto-related criminal investigations and the creation of crypto focused teams at DOJ and the FBI, we are likely to see efforts at coordination even further ramped up in the wake of the Order.

Treasury to focus on financial inclusion

Heralding one of crypto’s most compelling use cases, the Order directs the Treasury Department to “produce a report on the future of money and payment systems, to include implications for economic growth, financial growth and inclusion, national security, and the extent to which technological innovation may influence that future,” in order to inform an approach to crypto innovation. It is noteworthy that the White House focuses, not just on the risks associated with crypto, but also key benefits such as financial inclusion and technological innovation — a major takeaway of the Order.

The Order directs agencies to address regulatory gaps

Whether it is consumer and investor protection or financial stability and systemic risk, the Order calls on regulators to develop policy recommendations and address regulatory gaps. So, what is the Order talking about? In November the Treasury-led President’s Working Group (PWG) on Financial Markets released a report on stablecoins. The PWG — comprised of Treasury, the Federal Reserve, Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) — sought to address stablecoin runs and systemic risks and ultimately called on Congress to treat stablecoin issuers like banks. The PWG report is likely a jumping off point toward the additional coordination by financial regulators directed by the Order to address various risks and gaps.

Lots of work to do

While the Order lays out the foundation for interagency study and cooperation, the real work will be for the regulators in the coming weeks and months as they attempt to piece together a cohesive, coordinated clear regulatory framework for cryptocurrency.

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