Biden Executive Order on Ensuring Responsible Development of Digital Assets: A Critical Opportunity to Shape Blockchain & Cryptocurrency Policy
- The recently issued Executive Order does not resolve important policy questions, but recognizes and endorses the potential benefits of blockchain technology and adopts a process for mitigating the risks that could stunt the growth of the cryptocurrency industry.
- The next six months will be a critical time for federal agencies to develop policies that could shape federal policy for the next decade—and beyond.
- The Executive Order raises important questions on whether existing legal frameworks are adequate to accommodate sound Executive Branch and independent agency policies, potentially inviting further consideration of new legislation
On Wednesday, March 9, President Biden issued an Executive Order entitled Ensuring Responsible Development of Digital Assets.1 The President’s order represents the first time that the White House has sought to develop a coordinated plan for the regulation and development of digital assets, and it thus represents an important first step in direction of a consistent regulatory policy. The Executive Order specifies key policy objectives to guide this effort: (1) protecting US consumers, investors, and businesses; (2) preserving the stability of the US and global financial systems; (3) preventing illicit finance and national security risks; (4) reinforcing US leadership in the global financial system and technological competitiveness; (5) promoting access to safe and affordable financial services; and (6) promoting responsible technological development. While the Executive Order attempts to balance the risks and potential benefits of digital assets, it focuses on and prioritizes addressing the risks.
To promote these objectives, President Biden directs senior government officials to participate in an interagency process that will produce reports on a variety of topics relating to digital assets and their role in the financial system. In all, the Executive Order mandates the coordination of 18 different reporting or research initiatives among a diverse group of federal agencies, and the required reports will be due from June to October, with a plurality due September. Given the breadth of the topics covered, the upcoming months may prove to be a critical time for developing policies that could shape how blockchain technology and cryptocurrencies develop in the coming years and possibly, decades.
Policy Ambiguities Remain
The Executive Order notably does not resolve any of the more difficult policy questions frequently discussed in connection with the regulation of blockchain technology and cryptocurrencies. For example, the Executive Order does not direct federal agencies to adopt any particular policies relating to consumer or investor protection, and it does not establish standards for identifying uses of cryptocurrency that may threaten national security. Instead, the Executive Order recognizes key policy goals and then establishes a deliberative process to adopt concrete proposals to best help the federal government to achieve those goals. In addition, by placing an interagency process at the center of each of the key policy objectives, the Executive Order does not resolve any of the hard questions regarding the proper role and jurisdiction of each of the many Executive Branch and independent agencies that seek authority relating to digital assets. Indeed, the multiplicity of agencies and the independence of the Federal Reserve and the SEC in particular make it less likely that this process will clearly delineate the powers of the different agencies.
The Executive Order’s key policy goals give some indication of the Biden Administration’s current thinking about how these policy recommendations may develop. In addressing the potential adoption of a US-issued Central Bank Digital Currency (“CBDC”), the Executive Order reaffirms the view that “[s]overeign money is at the core of a well-functioning financial system, macroeconomic stabilization policies, and economic growth.”2 The Executive Order recognizes the potential value of a US-issued CBDC and expresses the intention that any US-issued CBDC should function in a fashion nearly identical to the traditional US dollar.3 The Administration further expects that any CBDC would incorporate “privacy protections” while at the same time ensuring that “the global financial system has appropriate “transparency.”4 Whether a CBDC (or any other digital asset) can reconcile the often-competing goals of privacy and transparency remains to be seen, but the Executive Order strongly suggests that the Administration expects to maintain the status quo with respect to banking privacy protections and anti-money laundering initiatives.
Similarly, a major focus of the Executive Order is on preventing the use of cryptocurrency for illicit transactions. So when the Executive Order directs the Secretary of the Treasury and other senior federal officials to offer views on “illicit finance risks posed by digital assets” or “the role of law enforcement and measures to increase financial services providers’ compliance with anti-money laundering and countering the financing of terrorism,” it is safe to say that this Administration does not expect any federal agency to support loosening current regulations.5 In other words, to the extent that the Biden Administration seeks to alter the status quo, we may expect a one-way ratchet in favor of increased regulation and tighter federal government control.
However, there are policy-related ambiguities in the Executive Order that have implications beyond the regulation of digital assets. For example, the Executive Order states that federal agencies should work to “ensure that digital assets do not pose undue risks to consumers, investors, or businesses.”6 The level of risk that is “undue” is a subject of debate with implications for the regulation of lending, securities and other investment products. At present, there is no one regulator in charge of determining the level of risk appropriate for digital assets. The Executive Order thus raises—but does not resolve—the question of whether the level of risk permissible for digital assets should be commensurate with that of securities, a market where the SEC has established distinct regimes for assets marketed only to accredited investors and those that can be marketed to the general public. Moreover, the Executive Order “encourage[s]” the independent financial regulators, including the Federal Reserve, the SEC and the CFTC, to consider “the extent to which investor and market protection measures within their respective jurisdictions may be used to address the risks of digital assets and whether additional measures may be needed.”7 It is not hard to extrapolate that these different agencies may take different degrees of “encouragement” from the Executive Order. The Executive Order gives the SEC in particular no reason to deviate from its current path, in which enforcement trods heavily and where useful guidance and direction to the industry is scarce and ambiguous.
Agency Reviews Required by the Responsible Development Executive Order
The reports required by the Executive Order will involve multiple federal agencies analyzing, among other matters: (1) the potential for the creation of a US-issued CBDC; (2) the impact of digital asset adoption on US consumers, investors, and businesses; (3) the role of law enforcement in investigating and prosecuting criminal activity relating to digital assets; and (4) the potential impacts of blockchain technology on the environment.8 The President has also directed the Financial Stability Oversight Council (“FSOC”) to report on the financial stability risks and any regulatory gaps presented by digital assets.9
The Executive Order places much of the heavy lifting for policy formation on the Treasury Department. The President has directed the Treasury Department to take the lead on reports addressing topics such as the “future of money and payment systems,” the “implications of . . . [the] adoption of digital assets” for the financial markets and payment systems, and has also tasked Treasury with developing a “coordinated action plan . . . for mitigating . . . digital-asset-related illicit finance and national security risks” and a “framework for interagency international engagement with foreign counterparts” and promoting the “adoption of global principles and standards for how digital assets are used and transacted.”10 But the Executive Order also includes a key role for the Department of Justice (“DOJ”), which has an important role to play assessing the legality of establishing a CBDC under current law, formulating a recommendation for any legislation necessary to implement a US-issued CBDC, reporting on the use of digital assets in connection with criminal activity, analyzing the impact of digital assets on competition policy, and formulating policies for strengthening “international law enforcement cooperation for detecting, investigating, and prosecuting criminal activity related to digital assets.”11
The Executive Order also envisions that the FTC, the SEC, the CFTC, the CFPB, and federal banking agencies will play key roles in these interagency deliberations.12 For example, the Executive Order encourages the FTC and CFPB to “consider the extent to which privacy or consumer protection measures within their respective jurisdictions may be used to protect users of digital assets and whether additional measures may be needed.”13 Similarly, as noted above, the Executive Order encourages the SEC, CFTC, Federal Reserve, Federal Deposit Insurance Corporation, and the Comptroller of the Currency to “consider the extent to which investor and market protection measures within their respective jurisdictions may be used to address the risks of digital assets and whether additional measures may be needed.”14 It appears that every federal agency that has, to date, been involved in regulating digital assets or enforcing relevant laws, will have a seat at the table for the required interagency processes.
The Need for Legislative Reforms
Although the Executive Order primarily focuses on developing policies and regulations that the Administration may implement under current authorities, it directs the DOJ to recommend legislation in two key areas: (1) the issuance of a CBDC; and (2) the investigation and prosecution of criminal activities relating to digital assets.
The DOJ’s report on whether “legislative changes would be necessary to issue a United States CBDC” is due in early September 2022.15 Because that report will be the linchpin on which other agencies’ efforts relating to the creation of a CBDC depend, it is likely to garner substantial attention from government agencies, Congress, and the finance industry.
With respect to proposing new legislation to address criminal activities, it is a good bet that Eun Young Choi, who was last month announced as the first Director of the DOJ’s National Cryptocurrency Enforcement Team (“NCET”), will have substantial involvement on any legislative recommendations. Assistant Attorney General for the Criminal Division Kenneth A. Polite, Jr. has stated that the “NCET will serve as the focal point for the department’s efforts to tackle the growth of crime involving [digital assets and distributed ledger] technologies.”16 The NCET also has been tasked with setting “strategic priorities regarding digital asset technologies, identify[ing] areas for increased investigative and prosecutorial focus, and lead[ing] the department’s efforts to coordinate with domestic and international law enforcement partners, regulatory agencies and private industry to combat the criminal use of digital assets.”17 As DOJ has, to date, been able to successfully prosecute a wide variety of crimes involving the use of digital assets when detected—including securities fraud, money laundering, theft, and ransomware attacks—it is foreseeable that DOJ’s legislative initiatives will focus on improving tools to detect and investigate crime involving digital assets.
The Responsible Development Executive Order represents an important step forward by tasking the Executive Branch to take a wide-ranging look at the key issues facing the cryptocurrency industry and other users of blockchain technology. To the extent that the Executive Order articulates any policy preferences, as opposed to kicking their development down the road, the Order reflects the Administration’s conservative preference for the slow and stable development of digital assets—a policy in some tension with the explosive growth that the industry has seen in recent years. Although it is not yet clear how the many initiatives required by the Executive Order may impact US policy, the Order provides a roadmap for action and therefore a guide by which key stakeholders may seek to have a voice in how policy and regulations concerning this important technology will develop in the coming years. Given the difficulties in adopting comprehensive legislation in this area, there is a real possibility that these administrative and regulatory changes could impact policy for decades to come.
1) Exec. Order No. 14067 of Mar. 9, 2022, 87 Fed. Reg. 14143 (Mar. 14, 2022), available at https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets/
2) Id. § 4(a)(i), 87 Fed. Reg. at 14145.
3) Id. § 4(a)(ii)–(iii), 87 Fed. Reg. at 14145–46.
4) Id. § 4(a)(ii), 87 Fed. Reg. at 14145.
5) Id. § 7(b), (c), 87 Fed. Reg. at 14149.
6) Id. § 5(a), 87 Fed. Reg. at 14147.
7) Id. § 5(b)(vi), 87 Fed. Reg. at 14148.
8) Id. §§ 4, 5, and 6, Fed. Reg. at 14145–47.
9) Id. § 6(a), 87 Fed. Reg. at 14148.
10) Id.§§ 4(b), 5(b), 7(c), 8(b)(i), 87 Fed. Reg. at 14146–47, 14149, 14151.
11) Id. §§ 4(d), 5(b)(iii), 5(b)(iv), 8(b)(iv), 87 Fed. Reg. at 14146–48, 14151.
12) Id. § 3, 87 Fed. Reg. at 14145.
13) Id.§ 5(b)(v), 87 Fed. Reg. at 14148.
14) Id. § 5(b)(vi), 87 Fed. Reg. at 14148.
15) Id. § 4(d)(i), 87 Fed. Reg. at 14146.
16) U.S. DEPARTMENT OF JUSTICE OFFICE OF PUBLIC AFFAIRS, Justice Department Announces First Director of National Cryptocurrency Enforcement Team (Feb. 17, 2022), available at https://www.justice.gov/opa/pr/justice-department-announces-first-director-national-cryptocurrency-enforcement-team.