New executive order sets national policy framework for digital assets and cryptocurrencies | Benesh

The executive order calls for research into a US Federal Reserve digital currency and regulatory measures to protect consumers, businesses and global financial stability.

On March 9, 2022, President Biden signed a comprehensive executive order entitled “Ensuring Responsible Development of Digital Assets” (the “supreme command“). The Executive Order gets the ball rolling on federal research on digital assets and cryptocurrencies and a future regulatory framework. However, it is important to note that the executive order does not implement any specific new policies, regulations or restrictions.

The executive order calls on the federal government and numerous agencies to coordinate and begin developing a national regulatory framework for digital assets and cryptocurrencies.

This framework will be guided by six key principles, including consumer protection, business protection and global financial stability. Importantly, the Executive Order calls for a series of studies (with various timelines specified in the Executive Order) looking at the various risks and benefits of digital assets and cryptocurrencies.

Specifically, the executive order calls on federal agencies to coordinate research on the development of the U.S. Federal Reserve’s digital currencies (“CBDCs“). The Federal Reserve, Treasury Department, Justice Department, Department of Homeland Security, and Office of Management and Budget, among others, will examine the impact that digital assets and the overall modernization of payment systems will have on the U.S. and global financial system.

Although no specific rules or regulations are set out in the Executive Order, it represents a major first step forward for the federal government into the world of digital assets and cryptocurrency. Another new federal government related to digital assets and cryptocurrencies came out of the passage of the Infrastructure Investment and Jobs Act and its reporting requirements in relation to cryptocurrency investments.

Companies considering or already involved in entering the digital assets or cryptocurrency space should closely monitor the results of the federal agency-led studies and what follow-up actions are being taken. In addition, such companies should prepare for a regulatory framework that focuses on the six principles set out in the Executive Order.

A further analysis of the Executive Order is provided below.

key definitions

With the breakneck speed at which digital asset and cryptocurrency systems have evolved, terms are often thrown around with no consistent meaning. The Executive Order establishes new definitions for common federal terms. These terms and definitions are likely to be the starting point for any future regulation.

“Blockchain” is defined as distributed ledger technologies where data is shared across a network creating a digital ledger of verified transactions or information between network participants. As per the executive order definition, such data is typically linked using cryptography (e.g. secure communications) to maintain ledger integrity and to facilitate things like the transfer of ownership or the value of a digital asset.

“Cryptocurrency” is defined as a category of digital assets through which records of generation or ownership are supported by distributed ledger technology based on cryptography, such as a blockchain. There is also a subcategory of cryptocurrency called “stablecoin”, defined as cryptocurrencies with mechanisms aimed at maintaining a stable value, such as supply in response to changes in demand.

“Digital assets” are broad and include any type of cryptocurrency, stablecoin, or CBDC, regardless of the technology used. Additionally, digital assets can be a commodity, derivative, or other financial product.

guiding principles

The executive order and accompanying fact sheet set out six guiding principles that federal agencies will use to develop a national regulatory framework for digital assets and cryptocurrencies. At a high level, these principles include: (1) protecting US consumers, investors and businesses; (2) protecting US and global financial stability; (3) reducing illicit financial activities and national security risks; (4) promoting US leadership and competitiveness; (5) promoting equal and fair access to financial systems; and (6) supporting responsible technological advances and developments.

1. Protecting US consumers, investors and businesses

First, the Executive Order directs government agencies to evaluate and develop policy recommendations. These recommendations aim to address the growing space of digital assets and cryptocurrencies, their impact, as well as the changes that the digital asset market has brought to the financial markets.

In addition, the Executive Order directs federal regulators to establish policies and procedures that ensure proper regulatory oversight. This oversight is designed to protect consumers, investors and businesses alike from the financial risks posed by digital assets and cryptocurrencies.

2. financial stability

Second, the Executive Order seeks to mitigate the negative impact that digital assets and cryptocurrencies could have on financial markets, both domestically and internationally. Specifically, the executive order refers to the Financial Stability Oversight Council as the federal regulator tasked with identifying and mitigating “economy-wide” risks. Under the executive order, the Financial Stability Oversight Council is directed to develop recommendations to address gaps in existing regulations that should be closed to adequately mitigate such risks.

3. Illegal Funding and National Security Risks

Third, the Executive Order seeks to address concerns about illicit financial activity and national security beyond simply mitigating purely personal financial risks. Under the executive order, a number of federal agencies are required to coordinate and communicate recommendations to mitigate national security risks and combat illicit financial activity. The same authorities are also instructed to work with international partners to ensure international frameworks are in place and that US allies are aware of and responsive to the risks that apply.

4. Technology leadership and competitiveness

Fourth, in order to promote the US in its technological and economic competitiveness, the executive order mandates the Department of Commerce to lead the development of a competition policy for digital assets and cryptocurrencies.

This policy will focus on building a common foundation that other federal agencies can then use and incorporate into their own policies, research and development when it comes to digital assets and cryptocurrencies. In general, the executive order emphasized the importance of US leadership not only in digital assets and cryptocurrencies, but also in maintaining leadership in the global financial market.

5. Equal access to financial systems

Fifth, the Executive Order states that the development of safe, affordable and accessible financial services is an urgent national interest; particularly noting the negative impact of past fiscal policies on underserved communities. According to the executive order, these past negative impacts on underserved communities will be considered when the federal government develops a policy and regulatory framework for digital assets and cryptocurrencies.

Here, the Minister of Finance is appointed under the Executive Order to lead the preparation of a report on future financial systems and the potential impact of these developments on economic growth and financial inclusion.

6. Responsible technological progress and development

Finally, the executive order directs the entire US federal government to take “concrete steps” to study and support all technological advances. These steps should focus on the responsible development of new and emerging financial systems and services, taking into account specific priorities such as privacy, security, combating illicit exploitation and possible negative impacts on the climate.

US Federal Reserve digital currency

One of the biggest points to emerge from the Executive Order is the fact that the federal government is investigating the implementation of CBDCs.

Specifically, the Executive Order directs the Federal Reserve to research and potentially implement such CBDCs. According to the Executive Order, the research will include examining the necessary technological infrastructure and capacity needed for any potential CBDC. This research also takes into account national security risks, consumer protection, equal access and the other principles listed above. The executive order also opens the door for the US to collaborate with international partners around the world in experimenting, developing and promoting the use of future CBDCs.

Additionally, the Secretary of the Treasury has the task of determining whether action by Congress is required to allow the Federal Reserve to implement such CBDCs.