Against the backdrop of accelerating advances in digital and distributed ledger technologies for the provision of financial services, the first U.S. Executive Order on digital assets sets a national strategy for coordinated government-wide efforts to protect consumers, financial stability, national security and the environment.
The growing global adoption of cryptocurrencies has introduced significant opportunities for consumers, businesses and investors to transact with one another directly, without a central authority, while raising sometimes novel regulatory issues for national financial authorities across the world.
This Reed Smith commentary describes the approaches of key global regulators in their quest to develop responsible frameworks that properly balance the benefits of cryptocurrencies with clear regulatory standards for consumer protection, fair market conduct, financial inclusion, financial stability, efficient retail and interbank transfers and payments, data privacy and security, appropriate taxation and more.
As the cross-border paradigm of cryptocurrencies evolves, an abiding tenet across jurisdictions is close coordination among global financial regulators. The purpose of increasingly close coordination is to foster adoption of tailored oversight frameworks that monitor and shape cryptocurrency regulation taking into account the particular characteristics and use cases of cryptocurrencies. Overall, financial regulators appear to see value in working together toward aligning the policy foundation of regulatory standards for a digital financial services world.
I. U.S. Crypto Policy
U.S. policy with respect to digital assets is to take strong steps to reduce the risks digital assets could pose to consumers, investors and businesses, financial stability, crime prevention, national security, human rights, financial inclusion and climate change. The new U.S. Executive Order focuses on a myriad of risks in the digital asset space that have been high priority issues for the Biden administration, including affordable domestic and cross border funds transfers and payments, financial inclusion and equity, cybersecurity, money laundering, sanctions evasion and environmental risks.
The U.S. Executive Order on digital assets adopts the level playing field principle “same business, same risks, same rules” and an incremental approach to applying regulatory and supervisory standards that govern traditional market infrastructures and financial firms. To carry out U.S. policy and objectives, the U.S. Executive Order establishes six priorities for government oversight of cryptocurrencies:
- consumer and investor protection
- financial stability
- mitigation of illicit finance
- U.S. leadership in the global financial system and economic competitiveness
- financial inclusion, and
- responsible innovation.
Recognizing that sovereign money is at the core of a well-functioning financial system that supports economic growth, the U.S. Executive Order places the “highest urgency” on efforts to design and deploy options for a U.S. central bank digital currency (“CBDC”). The U.S. Executive Order directs the Department of the Treasury (“Treasury”), together with other executive branch agencies and the federal banking agencies, to issue a report and recommendations to the President on the implications of a U.S. CBDC and the future of sovereign and privately produced money for the financial system and democracy. The Board of Governors of the Federal Reserve System is encouraged to continue its research into CBDCs and to develop a strategic plan for adopting a U.S. CBDC considering its effect on monetary policy.
Although the U.S. Executive Order establishes a whole-of-government strategy with respect to digital assets, U.S. government agencies have been actively addressing many of the issues and priorities articulated in the Executive Order for several years. For example, the Treasury, Financial Crimes Enforcement Network (“FinCEN”) determined in 2013 that exchangers and administrators of convertible virtual currencies are money services businesses subject to the Bank Secrecy Act and must register with FinCEN. Further, the Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission have taken a number of digital assets-based enforcement actions against individuals and entities since 2018.
Digital assets continue to draw regulatory and legislative scrutiny. While the pace of government rules, guidances and enforcement actions has been increasing recently, it may accelerate further once the research, studies and reports directed by the U.S. Executive Order have been completed and there is greater clarity around the direction of U.S. crypto rules. In the past few months, for example, regulators and legislators have taken the following actions, and we expect an increasing number of actions going forward:
- FinCEN extended the due date for comments in January 2021 on a notice of proposed rulemaking requiring money service businesses to submit reports, keep records, and verify the identity of customers in relation to transactions above certain thresholds involving hosted and unhosted wallets in certain jurisdictions identified by FinCEN.
- The Infrastructure Investment and Jobs Act enacted in November 2021 requires filing of currency transaction reports whenever a person receives digital assets in excess of $10,000-USD and requires digital asset brokers to report a taxpayer’s trades and transfers of digital assets.
- The federal banking agencies issued an inter-agency roadmap of crypto engagement in November 2021 that focuses on how banks could store crypto assets safely, settle and execute crypto trades, lend taking crypto as collateral, activities involving facilitation of customer purchases and sales of crypto and payments, including stablecoins, and activities that could result in holding crypto on a bank’s balance sheet.
- The Treasury, Financial Stability Oversight Council, in December 2021, published its 2021 annual report identifying the rapid growth of digital assets as a primary risk to the U.S. financial system.
- The SEC issued a proposed regulation amendment in January 2022 to expand coverage of Regulations ATS and SCI to U.S. Treasury securities alternative trading systems that raises the possibility of subjecting crypto trading and other platforms to regulation as "communication protocol systems."
- The Federal Reserve Board issued Money and Payments: The U.S. Dollar in the Age of Digital Transformation describing considerations related to potential issuance of a U.S. CBDC, and an International Finance Discussion Paper, Stablecoins: Growth Potential and Impact on Banking, both in January 2022.
- The Treasury issued a study in February 2022 on money laundering in the art trade, as required by the Anti-Money Laundering Act of 2020, which identified nonfungible tokens as an area of potential concern.
- The Federal Bureau of Investigation announced the formation of the Virtual Asset Exploitation Unit in February 2022, a specialized team dedicated exclusively to cryptocurrency, blockchain analysis and virtual asset seizure.