The executive order calls for exploring a U.S. central bank digital currency and regulatory measures that protect consumers, businesses, and global financial stability.
On March 9, 2022, President Biden signed a sweeping Executive Order titled “Ensure responsible development of digital assets” (the “Executive Decree”). The executive order kicks off federal research into digital assets and cryptocurrencies, as well as 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 directs 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 around six main principles, including the protection of consumers, businesses and global financial stability. It is important to note that the Executive Order calls for a number of studies (with various timelines indicated in the Executive Order) examining 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 digital currencies from the U.S. central bank (“CBDC”). The Federal Reserve, Department of the Treasury, Department of Justice, Department of Homeland Security, and Office of Management and Budget, among others, will study any impacts that digital assets and the general modernization of payment systems will have on the US and global financial system. .
While no concrete rules or regulations are spelled out in the executive order, it represents a first big step for the federal government into the world of digital assets and cryptocurrency. Another recent federal government related to digital assets and cryptocurrencies came with the passage of the Infrastructure Investment and Employment Act and its reporting requirements related to cryptocurrency investments.
Entities considering entering or already involved in the digital asset or cryptocurrency space should pay close attention to the results of studies conducted by the federal agency and subsequent actions taken. In addition, these entities must prepare for a regulatory framework centered on the six principles set out in the executive decree.
A more in-depth analysis of the decree is presented below.
With the breakneck speed at which digital asset and cryptocurrency systems have developed, terms are often thrown around with no coherent meaning. The executive order establishes new definitions at the federal government level for common terms. These terms and definitions will likely be the starting point for any future regulations.
“blockchainis defined as distributed ledger technologies where data is shared over a network that creates a digital ledger of verified transactions or information between network participants. As defined by the executive order, this data is generally linked using cryptography (for example, secure communication) to maintain the integrity of the ledger and to facilitate things like transferring ownership or value of a digital asset.
“Cryptocurrencyis defined as a category of digital asset through which generation or ownership records are supported via distributed ledger technology that relies on cryptography, such as a blockchain. There is also a subcategory of cryptocurrency called “stablecoin” defined as cryptocurrencies with mechanisms to maintain stable value, such as aligning the value of the cryptocurrency to a specific currency or asset, or using algorithms to control supply in response to changing demand.
“Digital assetsis defined broadly to include, regardless of the technology used, cryptocurrency, stablecoin or a CBDC. Additionally, digital assets can be a commodity, derivative, or other financial product.
The executive decree and its accompanying sheet sets out six guiding principles that federal agencies will use to develop a national regulatory framework for digital assets and cryptocurrency. At a high level, these principles include: (1) protecting American consumers, investors, and businesses; (2) protect US and global financial stability; (3) mitigate illicit financial activities and national security risks; (4) promote US leadership and competitiveness; (5) promote fair and equitable access to financial systems; and (6) support responsible technological progress and development.
1. Protection of American consumers, investors and businesses
First, the executive order directs government agencies to assess and develop policy recommendations. These recommendations aim to address the growing field of digital assets and cryptocurrencies, its implications, as well as the changes that the digital asset market has brought to financial markets.
Additionally, the executive order directs federal regulators to put in place policies and procedures that ensure appropriate regulatory oversight. This oversight aims to protect consumers, investors and businesses from the financial risks posed by digital assets and cryptocurrencies.
2. Financial stability
Second, the decree aims to mitigate the negative effects that digital assets and cryptocurrencies could have on financial markets nationally and internationally. Specifically, the executive order designates the Financial Stability Supervisory Board as the federal regulator responsible for identifying and mitigating “economy-wide” risks. Under the decree, the Financial Stability Supervisory Board is tasked with developing recommendations to address any gaps in existing regulations that would need to be filled to properly mitigate these risks.
3. Illicit financing and national security risks
Third, the executive order seeks to address concerns about illicit financial activities 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 illegal financial activity. These same agencies are also responsible for working with international partners to ensure that international frameworks are in place and that US allies are aware of and respond to applicable risks.
4. Technological leadership and competitiveness
Fourth, to promote the United States as a leader in technological and economic competitiveness, the Executive Order calls on the Department of Commerce to lead the development of a digital asset and cryptocurrency competitiveness policy.
This policy will focus on creating a general foundation that other federal agencies can then use and incorporate into their own policies, research and development as they relate to digital assets and cryptocurrencies. Generally speaking, the executive order underscored the importance of US leadership not only in digital assets and cryptocurrencies, but also in maintaining leadership in the global financial market.
5. Equitable access to financial systems
Fifth, the executive order states that the development of safe, affordable and accessible financial services is an urgent national interest; specifically noting the negative impacts of past financial policies on underserved communities. According to the executive order, these past negative effects on underserved communities will be considered as the federal government develops a policy and regulatory framework on digital assets and cryptocurrency.
Here, the Secretary of the Treasury is appointed under the Executive Order to lead the production of a report on future financial systems and the implications these developments will eventually have on economic growth and financial inclusion.
6. Responsible technological advances and development
Finally, the executive order directs the entire US federal government to “take concrete steps” to investigate and support all technological advances. These measures should focus on the responsible development of new and emerging financial systems and services, bearing in mind certain priorities such as privacy, security, the fight against illicit exploitation and possible negative impacts on the climate.
US central bank digital currency
One of the most important things to come out of the executive order is that the federal government is studying the implementation of CBDCs.
Specifically, the executive order directs the Federal Reserve to research and possibly implement such CBDCs. Under the executive order, the research will include examining the necessary technology infrastructure and capacity needed for any eventual CBDC. This research will also keep in mind the risks to national security, consumer protection, fair access and the other principles listed above. The executive order also opens the door for the United States to cooperate with international partners around the world to experiment with, develop, and promote the use of any future CBDCs.
Additionally, the Secretary of the Treasury is responsible for determining whether congressional action is required to grant the Federal Reserve the ability to implement such CBDCs.