By Jonah Crane and Andreas Westgaard
On March 9, 2022, President Biden issued an “Executive Order on Ensuring the Responsible Development of Digital Assets.” The digital asset industry has reacted with a combination of relief and enthusiasm. Major digital assets rose as much as 10% when news of the order broke, and industry figures described the order as “a turning point,” “watershed moment,” and “about as good as we could ask.”
U.S. Leadership and Central Bank Digital Currency
The executive order places great importance on U.S. competitiveness and leadership. The discussion of U.S. leadership highlights the duality echoed throughout the order itself, the accompanying fact sheet, and the comments of Administration officials discussing the order (all worth reading). The order emphasizes, at times defensively, historical U.S. leadership in technology and innovation, and the importance of the centrality of the United States to the global financial system. The order also lauds U.S. leadership on the development of regulatory frameworks and the prevention of illicit activities, a major focus of the order.
The order provides the strongest push on efforts to develop a central bank digital currency (CBDC), calling CBDC research a matter of “highest urgency.” On this topic in particular the order appears sensitive to the perception that the U.S. is lagging behind, and highlights the importance of “showcasing US leadership.” The order directly links development of a CBDC to maintaining the “centrality of the United States within the international financial system.” This is often perceived as a direct competition with China. However, officials’ statements made clear that the U.S. does not view the introduction of a Chinese CBDC, in itself, as representing a threat to that order.
Balancing Innovation and Risk
Senior administration officials, briefing reporters on the order, highlighted the critical role of innovation for both economic and national security. The order itself highlights the potential of digital assets to support faster, cheaper payments and boost economic growth. The order also recognizes the significant shortcomings of the status quo. Administration officials referred to existing payments infrastructure as “antiquated,” leaving the “United States and its consumers with options that are slow, costly, or altogether inaccessible.” This is a strong reminder that new innovations should be measured against the status quo, not Platonic ideals. But at the same briefing, another official reminded the audience that “certain earlier forms of financial innovation have ended up hurting American families while making a small group of people very rich.”
Overall, and despite the tone of public statements and the White House Fact sheet, the word “innovation” makes only 12 appearances in the order itself, whereas “risk” is used 47 times. The order focuses most intently on financial crime risks—the word “illicit” appears 24 times. The order was most focused on risks arising from jurisdictions who have not adopted the Financial Action Task Force (FATF) recommendations, which were shaped under U.S. leadership of the FATF. A senior administration official briefing reporters on the order called the “insufficiency of international implementation of anti-money laundering network and frameworks for digital assets” the “greatest vulnerability” of digital asset ecosystems. Notably, decentralized finance received its only mention alongside non-FATF compliant jurisdictions, as a potential source of similar risks.
A Proactive Role for the Public Sector
One prominent industry leader compared the executive order to the Clinton administration’s approach to regulation of e-commerce in the early days of the Internet. Compared to Clinton’s “Framework for Global Electronic Commerce,” and even compared to Obama’s “whole-of-government” effort to develop an International Strategy on Cyberspace, Biden’s executive order signaled a much more robust role for policy, governance, and regulation–on both a national and global scale.
The Clinton framework advocated a minimalist role for government, arguing that “the private sector should lead” and “governments should avoid undue restrictions on electronic commerce.” It also acknowledged the frictions inherent in applying legacy regulatory frameworks to new and emerging technologies. “We should not assume,” the authors cautioned, “that the regulatory frameworks established over the past sixty years for telecommunications, radio and television fit the Internet. … Existing laws and regulations that may hinder electronic commerce should be reviewed and revised or eliminated to reflect the needs of the new electronic age.”
By contrast, the executive order makes no mention of the challenges of applying decades-old regulatory frameworks, suggesting only that new risks may warrant “evolution to a regulatory framework that can adequately address those risks” (emphasis added). Indeed, the executive order endorses the principle of “same business, same risks, same rules,” suggesting its authors do not believe significant reforms to existing regulatory frameworks are necessary.
The report does not include specific directions to any of the regulators with actual authority over cryptocurrency activities, such as the banking regulators, SEC, and CFTC. Those agencies are typically not subject to executive orders as they are not deemed to be “executive branch“ agencies for this purpose. But given the order’s emphasis on consumer and investor protection, financial stability, and illicit activity, each agency can find plenty of justification for nearly any actions they may be contemplating with respect to digital assets. For example, the day after the order was issued, the Department of Labor published an alert expressing “serious concern” with the investment of 401k plan assets in cryptocurrencies, and warning that DOL would investigate “plans that offer participant investments in cryptocurrencies and related products.”
The report also does not expressly promote coordination or cooperation among U.S. regulatory agencies, except in so far they are required to coordinate to produce the requested reports, and as part of the work assigned to the Financial Stability Oversight Council. The order mentions “cooperation” seven times—all in reference to international coordination to address illicit activity risks.
The order directs 23 separate agencies or offices to produce 20 reports, most within 180 days (see here for an excellent summary by Davis Polk). The order does not directly call for any specific legislative changes, instead asking the Department of Justice to produce a report identifying any legislative changes needed to address cryptocurrency risks on the one hand or to facilitate the development of a CBDC on the other.
The next significant milestone is likely the forthcoming report led by the Treasury Department on “the future of money and payments.” The Federal Reserve made clear that it would seek both executive branch and Congressional support to move forward with a CBDC. Treasury’s report, together with other reports required under the Executive Order, will pave the path for the Federal Reserve to continue working on a CBDC and likely offer guidance on key policy issues such as balancing privacy and the need to protect against illicit finance.
The Clinton Administration’s framework for electronic commerce was the output of 18 months of interagency collaboration, and articulated a clear vision for the kinds of policies that would “facilitate the growth of commerce on the Internet.” The digital asset executive order represents a beginning, not an end. It sets in motion a sprawling interagency process. It is undoubtedly better to at least attempt government-wide coordination rather than continue down a path where technological, national security, geopolitical, financial, and regulatory issues are considered separately. As my friends Matt Homer and Paul Watkins have astutely pointed out, the proof will be in the follow-through. But the order is a good start, and the reports that will be produced in coming months will undoubtedly be influential for years to come.
The industry has chosen to view the executive order, and the marshaling of a broad array of government agencies, as a positive step and an invitation to engage. If the industry follows through on that impulse with a desire to meet the Administration’s policy objectives, and is met on the other side of the table with open minds and honest feedback, this may well be the watershed moment for digital assets that so many in both the public and private sectors have sought.
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