Everything you need to know about the White House's framework on digital assets
Last week, the White House released its first ever Framework for the Responsible Development of Digital Assets. The Framework is the response to President Biden’s March Executive Order, which required government agencies to delve into the opportunities and challenges posed by digital assets for the US economy and its consumers, as well as the impacts on national security.
The framework is split into seven sections, covering:
- The protection of consumers, investors and businesses
- Promoting access to safe and affordable financial services
- Fostering financial stability, advancing responsible innovation
- Reinforcing US global financial leadership and competitiveness
- Fighting illicit finance
- Exploring a U.S. Central Bank Digital Currency (CBDC)
Each section makes a set of recommendations for how the US should advance their response to digital assets, and is based on nine reports which were submitted in response to the Executive Order.
Here is what you need to know about the reports and their recommendations:
Detecting, Investigating, And Prosecuting Criminal Activity Related to Digital Assets
This DOJ report details the steps already taken by departments and agencies to combat the illicit use of digital assets. It explores how the legal and regulatory framework needs to keep pace with technological change and provides recommendations for how these frameworks can do so to strengthen the ability to detect, investigate, prosecute, and otherwise disrupt criminal activity utilizing digital assets.
In addition to this report, the DOJ also announced the establishment of a nationwide Digital Asset Coordinator (DAC) network which will work to further combat the threat posed by the illicit use of digital assets.
The Future of Money and Payments
The US Treasury released three reports in response to the Executive Order, the first covered The Future of Money and Payments. This report responds to whether the US should develop its own Central Bank Digital Currency (CBDC) and how the payments system needs to adapt to ensure that it will sufficiently serve consumers for years to come. This includes exploring the use of stablecoins and instant payments. The report recommends the advancement of work on a possible US CBDC,, encourages the use of instant payments, recommends the establishment of a federal framework for payments regulation, and lastly, recommends the prioritization of efforts to improve cross border payments.
Crypto-Assets: Implications for Consumers, Investors and Business
The second US Treasury report takes a closer look at cryptocurrencies and how they are currently being used by consumers and investors. It considers the risks that these parties are exposed to, with a particular focus on vulnerable populations. Although it makes clear that a number of risks that face crypto assets, such as conduct and market integrity risks, operational risks, and intermediation risks are the same as those faced by traditional financial products, it also specifies that the crypto industry is exposed to a unique set of risks.
To help combat these risks,protect consumers, and promote the responsible adoption of crypto assets, the report recommends that US regulatory and law enforcement agencies monitor the crypto-asset sector for unlawful activity and, where applicable, enforce these laws. The report also recommends that regulatory agencies continue to issue guidance and rules when needed to limit risks. Lastly, the report recommends that the Financial Literacy and Education Commission provide trustworthy information on crypto-assets.
Action Plan to Address Illicit Financing Risks of Digital Assets
As the name suggests, this report lays out the US Government’s plan to tackle the illicit financing risk in digital assets. It begins by providing a comprehensive overview of how digital assets have been exploited to date by malicious actors, and goes on to explore the various vulnerabilities of digital assets to such abuse. To counter these vulnerabilities, the report lays out a detailed set of priority actions which are grouped by theme, as follows:
- Monitoring emerging risks - which includes producing national risk assessments for DeFi and NFTs
- Improving global AML/CFT regulation and enforcement
- Updating BSA regulations
- Strengthening US AML/CFT supervisions of virtual asset activities
- Holding accountable cybercriminals and other illicit actors
- Engaging with the private sector
- Supporting US leadership in financial payments and technology
The Action Plan has been followed with a formal Request for Comment which sets out a list of questions where the Treasury is keen for public engagement. These open-ended questions cover general illicit finance risks, and call for suggestions on regulation and supervision, global implementation of AML/CFT standards, private sector engagement,AML/CFT solutions and AML/CFT controls for CBDCs.
Technical Evaluation for a US Central Bank Digital Currency System
This White House report explores how policy objectives for a US CBDC system could be developed in further detail through an interagency process led by the National Economic Council and the National Security Council. It considers the technical design choices for a US CBDC system, and estimates the feasibility of building such a system. It also assesses the impacts on cybersecurity, privacy, customer experience and social security.
Responsible Advancement of the US Competitiveness in Digital Assets
In this report, the Department of Commerce explores how the US can reinforce leadership in the global financial system as well as foster technological and economic competitiveness through digital assets. To do so, it highlights the importance of effective regulatory approaches, international engagement, meaningful public-private partnerships and sustained research and development in the digital asset space.
Climate and Energy Implications of Crypto-Assets in the United States
This report explores the challenges and opportunities of crypto-assets for energy and climate change issues, and considers whether the adoption of crypto-assets might hinder the climate commitments and goals of the US. It recommends understanding and monitoring the impacts of crypto-assets on the environment, advancing energy efficiency standards as well as encouraging transact and improvements in environmental performance and further research in this area.
Factsheet: Framework for International Engagement on Digital Assets
In addition to the above reports, the US Treasury published a framework earlier this summer which sets out how the US will engage with partner countries on digital assets. This framework applies the policy priorities in the President’s Executive Order to the international engagements that the US sees as relevant to its response to digital assets. It lists the key engagements as those with: the G7, G20, Financial Stability Board, Financial Action Task Force (FATF) and the Egmont Group, the OECD, other standard setting bodies such as the Bank of International Settlements, the IMF and the World Bank.
How To Strengthen International Law Enforcement Cooperation For Detecting, Investigating, And Prosecuting Criminal Activity Related To Digital Assets
Finally the DOJ published a relevant report back in the June that examined how best foreign law enforcement agencies can collaborate to ‘locate and gather electronic records and digital evidence involving off-shore digital asset issuers, trading platforms service providers and other online infrastructure; to seize and prevent further distribution of digital assets linked to crime; and identify and hold responsible criminal actors who exploit’ these technologies. The report recommends that additional efforts should be taken to build the capacity of foreign counterparts on complex investigations, to improve coordination between agencies and to promote more uniform regulation between the US and its partners based on the proper implementation of international standards.
Following the release of these reports and the overarching Framework there has been further activity related to the future of digital assets in Washington D.C.. The House Financial Services Committee held a session on the national security implications of alternative payment systems. TRM’s Ari Redboard was a witness at the hearing and covered the importance of utilizing the transparency provided by blockchain based technology for enabling the future of finance and the tracing of illicit finance, read his written testimony here.
Overall, this considerable body of work will set the agenda for U.S. agencies for years to come on. Across the reports key themes emerge which include the need to closely monitor the risks of digital assets as they develop, to fill any regulatory gaps that weaken the responsible adoption of digital assets and lastly the need to work closely with partners whether they be in another government department, in the private sector or abroad. In fulfilling these recommendations the U.S. will likely ensure that the positive aspects of digital assets are maximized for the American people.
Key upcoming dates:
- November 3, 2022: close of the Request for Comment period
- February 24, 2023: publication of the National Risk Assessment of money laundering and terrorist financing risks of Decentralised Finance (DeFi)
- July 2023: publication of the National Risk Assessment of money laundering and terrorist financing risks of Non-Fungible Tokens (NFTs)
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