The White House and Digital Assets – A First Look at the Executive Order
On March 9, The White House released its highly anticipated Executive Order on Ensuring Responsible Development of Digital Assets which laid out the Administration’s plans to study, regulate and potentially issue cryptocurrency through the central bank.
As early as last year, Biden’s Administration had been considering an order concerning oversight of the cryptocurrency market. The Executive Order directs the U.S. Department of Treasury and other federal agencies to study the impact of cryptocurrency on financial stability and national security. It further directs the Federal Reserve to explore whether the central bank should create its own digital currency.
According to Reuters, the order asks the Justice Department to look at whether a new law is needed to create a new currency, with the Treasury, Securities and Exchange Commission, Federal Trade Commission, Consumer Financial Protection Commission and other agencies to study the impact on consumers and investors.
“The Executive Order sets out a game plan for the Administration to more holistically consider what to do about digital assets. While many parts of the government were already at work on regulating aspects of crypto, the Executive Order brings it together and provides insights into how the White House is thinking through the issue,” said Aaron Klein, Senior Fellow in Economic Studies at the Brookings Institution.
The White House issued a Fact Sheet that provides a summary of the 16 page order, and highlights the actions outlined by the President. The measures will focus on six key areas:
- Consumer and investor protection. The order directs the Department of the Treasury and other agency partners to assess and develop policy recommendations to address the implications of the growing digital asset sector and changes in financial markets for consumers, investors, businesses, and equitable economic growth. The order also encourages regulators to ensure sufficient oversight and safeguard against any systemic financial risks posed by digital assets.
- Financial stability. The order encourages the Financial Stability Oversight Council to identify and mitigate economy-wide (i.e., systemic) financial risks posed by digital assets and to develop appropriate policy recommendations to address any regulatory gaps.
- Illicit activity. The order directs an unprecedented focus of coordinated action across all relevant U.S. Government agencies to mitigate these risks. It also directs agencies to work with our allies and partners to ensure international frameworks, capabilities, and partnerships are aligned and responsive to risks.
- U.S. competitiveness on a global stage. The order directs the Department of Commerce to work across the U.S. Government in establishing a framework to drive U.S. competitiveness and leadership in and leveraging of digital asset technologies. This framework will serve as a foundation for agencies and integrate this as a priority into their policy, research and development, and operational approaches to digital assets.
- Financial inclusion. The order affirms the critical need for safe, affordable, and accessible financial services as a U.S. national interest that must inform our approach to digital asset innovation, including disparate impact risk. Such safe access is especially important for communities that have long had insufficient access to financial services. The Secretary of the Treasury, working with all relevant agencies, will 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.
- Responsible innovation. The order directs the U.S. Government to take concrete steps to study and support technological advances in the responsible development, design, and implementation of digital asset systems while prioritizing privacy, security, combating illicit exploitation, and reducing negative climate impacts.
- U.S. Central Bank Digital Currency (CBDC). The order directs the U.S. Government to assess the technological infrastructure and capacity needs for a potential U.S. CBDC in a manner that protects Americans’ interests. The Order also encourages the Federal Reserve to continue its research, development, and assessment efforts for a U.S. CBDC, including development of a plan for broader U.S. Government action in support of their work. This effort prioritizes U.S. participation in multi-country experimentation and ensures U.S. leadership internationally to promote CBDC development that is consistent with U.S. priorities and democratic values.
The Executive Order mandates a series of reports that will outline and set direction for cryptocurrency policy and the future of digital currency. The reports are to be delivered in 180 days indicating how quickly the administration is moving. These reports could result in additional questions or concerns, or conclude that Congressional approval is necessary for some, or all, policy shifts.
Many experts described the executive order as “extremely positive,” “long overdue,” and an “acknowledgment that cryptocurrency is here to stay.” It serves as a good reminder that U.S. policy makers are paying close attention to crypto and how it could change financial markets in the future.
The Executive Order could provide markets regulators with more rationale to bring cryptocurrencies under their control, a move that will likely mean more regulations and increased cost for compliance. In a speech to the Aspen Institute in 2021, Securities and Exchange Commission Chair Gary Gensler referred to the crypto market as the “Wild West.” He noted that “financial innovations throughout history don't long thrive outside of our public policy frameworks,” and vowed to use the full authority of his office to protect investors and "prevent transactions, products, and platforms from falling between regulatory cracks."
According to some observers, the Executive Order may lack the protection necessary to limit bad actors while still allowing innovation in digital currency. John Berlau, Senior Fellow and Director of Finance Policy at the Competitive Enterprise Institute, stated that “the potential for regulatory overreach and the inherent dominance of a central bank developed currency would have negative effects on consumers, transaction privacy and the availability of business and consumer credit.”
However, in general, the industry has been receptive to a thoughtful research and regulatory approach by various U.S. agencies. Brett Harrison, President of FTX.US signaled in an interview on Fox Business News that institutional money may start pouring into the crypto economy with this approach. “Some amount of regulation is important to allow institutions to come in and feel confident in being able to put their money into this emerging space like cryptocurrency,” said Harrison. With respect to the order, Harrison saw it as, “...a call for people to do research and come back with reports to understand what areas need regulation and what areas don’t.”
The Fed published a white paper in January concerning the potential creation of a CBDC that would complement existing payment systems. It found that a CBDC could make payments cheaper and easier for consumers, but might also pose a risk to the stability of the U.S. financial system.
An additional aspect is the impact on stablecoins. CNBC noted in its analysis of the statement that “while policymakers have been keen to downplay any systemic risks resulting from crypto, there have been increasing concerns over the role played by stablecoins. The topic was notably absent from the White House’s announcement, though Treasury Secretary Janet Yellen made clear she wants to see Congress introducing regulation for the sector.”
Ari Redbord, Head of Legal and Government Affairs at TRM Labs, noted his biggest takeaway from the order is the “embrace of cryptocurrency”. “The order talks about the need for American leadership in the digital space race, the power and promise of financial inclusion, and the growing crypto economy. Of course, there is a focus on the risks and challenges - as there should be - but it is framed by the need for thoughtful regulation and leadership.”
The President’s order comes amid a debate on whether crypto has been a net positive or negative during Russia’s invasion of Ukraine. Democratic legislators sent a letter last week to Treasury Secretary Janet Yellen expressing concern about the potential use of cryptocurrency to evade sanctions.
Last year, criminal activity netted around $14 billion from crimes involving crypto. Regulators hope that increased oversight and regulatory authority resulting from this order will provide additional protections for consumers and investors.
Secretary Yellen released a statement commenting that her department “will partner with interagency colleagues to produce a report on the future of money and payment systems. We’ll also convene the Financial Stability Oversight Council to evaluate the potential financial stability risks of digital assets and assess whether appropriate safeguards are in place. And, because the questions raised by digital assets often have important cross-border dimensions, we’ll work with our international partners to promote robust standards and a level playing field.”
Yellen’s statement committed the Department to work with and be guided by consumer and investor protection groups, market participants, and other leading experts.
The MRC will continue to monitor and participate as appropriate in these discussions and keep members informed and up to date with any relevant developments.
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