The order directs federal agencies to focus on six priority areas within the digital asset sector and potential development of a US CBDC.
On March 9, 2022, President Biden issued an Executive Order on Ensuring Responsible Development of Digital Assets (Order). In the face of rapid advancement in blockchain technology and its applications, the Order asserts that “an evolution and alignment” in the approach of the various federal agencies (Agencies) to digital assets is necessary. It directs the Agencies to study the risks of digital assets to the US economy, investors, and consumers, and to explore the development of a US central bank digital currency (CBDC). The Order also directs the Agencies to monitor and assess the impact of digital assets on financial stability and financial system integrity, the prevention of crime and illicit finance, national security, financial inclusion and equity, energy policy, and climate change.
The fact sheet accompanying the Order strikes an optimistic tone, noting that “the rise in digital assets creates an opportunity to reinforce American leadership in the global financial system and at the technological frontier.” Seizing these opportunities, however, must be balanced with understanding and mitigating the risks involved. Accordingly, the Order directs the Agencies to guide responsible innovation domestically and to work cooperatively with the private sector and international partners.
The Order mandates the Agencies overseeing the financial markets and protecting consumers to identify risks, establish policy frameworks to promote leadership in US digital asset technologies, and make policy recommendations regarding the regulation of digital assets.
The Six Key Priority Areas
The Order seeks to establish a whole-of-government strategy for responsible development of digital assets, focusing on six key areas of priority:
- Consumer, investor, and business protection: The Agencies are directed to assess and develop policy recommendations to address and mitigate the risks that digital assets pose to consumers, investors, businesses, equitable economic growth, and the larger financial system. Such risks include fraud, manipulation, and abuse, as well as data privacy concerns.
- Financial stability: The Financial Stability Oversight Council (FSOC) is directed to produce a report to identify and mitigate systemic financial risks that digital assets pose, and to develop appropriate policy recommendations to address any regulatory gaps, in line with the general principle of “same business, same risks, same rules.”
- Illicit finance and national security: The Agencies are directed to take a coordinated approach to assess and mitigate risks that digital assets pose to national security, especially when used to facilitate illicit financial transactions, such as trafficking, ransomware, money laundering, sanctions evasion, and other criminal activity. In the wake of the sanctions campaign against the Russian Federation in response to its invasion of Ukraine, preventing bad actors from evading sanctions through the use of digital assets and decentralized finance has become a top priority.
- US leadership in the global financial system and economic competitiveness: The Department of Commerce is directed to establish a framework to drive US competitiveness and leadership in digital asset technologies, with a particular focus on promoting democratic values; the rule of law; privacy; the protection of consumers, investors, and businesses; and interoperability with digital platforms, legacy architecture, and international payment systems.
- Financial inclusion and equitable access: The Department of the Treasury is directed to work with all relevant Agencies to “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 Agencies are directed 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 exploitation, and reducing negative climate impacts.
US CBDC in Focus
The Order “places the highest urgency” on the need for continued research, analysis, and possible development of a US CBDC, particularly by the Board of Governors of the Federal Reserve System (FRB). In a recently published discussion paper, the FRB took a measured approach to evaluating the potential benefits and risks of issuing a CBDC, and stated that it would not move ahead with a CBDC “without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law” (see this Latham blog post for more information). As a first step, a subset of the Agencies are directed to prepare a report “on the future of money and payment systems” and deliver it to President Biden by September 5, 2022. The report is to include an analysis of the implications, risks, and opportunities of a CBDC for the public and private sectors. In addition, the Attorney General, in consultation with the Secretary of the Treasury and the Chairman of the Federal Reserve, is directed to provide the president with an assessment of “whether legislative changes would be necessary to issue a US CBDC, should it be deemed appropriate and in the national interest.”
International Coordination Is Key
A critical aspect of the Biden Administration’s approach is to support the G20 roadmap for addressing challenges with cross-border funds transfers and payments, and to facilitate cooperation, coordination, and information sharing between the US and critical international partners on the role of digital assets and CBDC in alleviating these challenges.
To that end, the Order directs the Secretary of the Treasury, in consultation with other Agencies, to “establish a framework for interagency international engagement with foreign counterparts and in international fora to, as appropriate, adapt, update, and enhance adoption of global principles and standards for how digital assets are used and transacted.”
Agency and Committee Heads Comment on the Order
- According to a statement by Janet Yellen, Secretary of the Treasury, the Order supports responsible innovation while addressing various risks to the financial system and consumers. Secretary Yellen lauded the Order for mobilizing the various Agencies and FSOC to “evaluate the potential financial stability risks of digital assets and assess whether appropriate safeguards are in place.”
- Rostin Behnam, Commodity Futures Trading Commission Chairman, published a statement in which he noted that the Order “will ensure greater cooperation and coordination between various cabinet-level agencies, the independent market regulators and prudential regulatory bodies.”
- Gary Gensler, Chairman of the Securities and Exchange Commission, publicly stated in response to the release that he looks forward to collaborating with other Agencies on the priorities of the Order, with the objective of protecting consumers, investors, and the financial system.
- Congresswoman Maxine Waters, Chairwoman of the House Financial Services Committee, praised the Order for emphasizing the need for the Agencies to study and potentially develop a CBDC. She has voiced support for a CBDC in light of the potential financial inclusion benefits for underserved communities and unbanked individuals in the US.
The Order reflects the Biden Administration’s “whole-of-government approach” to tackle the large-scale and sprawling issues that digital assets pose. The Order does not purport to take specific technical issues head-on or to fundamentally change the current digital asset regulatory landscape. However, it may succeed in accelerating the rate at which the Agencies cooperate, coordinate, and constructively tackle the priorities outlined in the Order. In this regard, the Order directs the production of numerous reports over the coming months on different aspects of the priorities described above. The reports will then inform the White House of pitfalls, opportunities, and next steps, potentially toward the development of a comprehensive federal framework for the governance of digital assets.