The comprehensive framework, which spans multiple reports, aims to spur risk mitigation efforts and potentially a US central bank digital currency.
By Alan W. Avery, Arthur S. Long, Yvette D. Valdez, Stephen P. Wink, Douglas K. Yatter, Pia Naib, Adam Bruce Fovent, and Deric Behar
On September 16, 2022, the White House published a fact sheet described as the first-ever “Comprehensive Framework for Responsible Development of Digital Assets” (the Framework). The Framework articulates the Biden Administration’s intended approach to the responsible development of the digital asset space and comes in response to a range of reports from various financial services regulators that were released over the previous few months. These reports include three that the Department of the Treasury published on the same day as the Framework, addressing the future of money and payment systems, consumer and investor protection, and illicit finance risks.
The Framework is the product of six months of research and assessment by the federal government into the digital assets sector, as mandated pursuant to the March 9, 2022, Biden Executive Order on Ensuring Responsible Development of Digital Assets (Order) (see this Latham blog post for more information). The Order sought to establish a whole-of-government strategy for responsible development of digital assets. It called for an alignment of approach by the various federal agencies and regulators on the opportunities and risks of digital assets to the US economy, investors, and consumers.
The Framework does not necessarily break new ground, representing more of a synthesis of the Biden Administration’s reception and intended response to the reports mandated under the Order. It does, however, provide legislators and the various federal regulators overseeing the financial markets and protecting consumers with a coherent set of guiding principles. Notably, although the Framework acknowledges potential benefits and positive use cases for blockchain innovation and digital assets, the emphasis is generally on managing risk, protecting consumers, and maintaining financial stability.
As noted above, the Framework is the culmination of the research and analysis from nine reports submitted to the president since the Order, including three that the Department of the Treasury issued on the same day the Framework was announced. The Framework articulates the Biden Administration’s intended approach to the Order’s key priority areas and policy objectives, as follows:
Fostering Financial Stability
In order to identify and mitigate systemic financial risks that digital assets pose, and to address any regulatory gaps, the Framework directs the Treasury Department to:
- work with other agencies to identify, track, and analyze emerging strategic risks that relate to digital asset markets;
- work with financial institutions to bolster their capacity to identify and mitigate cyber vulnerabilities through information sharing and analytical tools; and
- collaborate with US allies on identifying such risks (including the Organization for Economic Co-operation and Development (OECD) and the Financial Stability Board (FSB)).
The Financial Stability Oversight Council (FSOC) is also tasked with publishing a report (due in October 2022) discussing digital assets’ financial-stability risks and identifying related regulatory gaps.
Countering Illicit Finance
In order to 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), the Framework sets out the following goals:
- Continue to monitor the development of the digital assets sector and its associated illicit financing risks, to identify any gaps in the US legal, regulatory, and supervisory regimes
- Continue to expose and disrupt illicit actors and address the abuse of digital assets
- Enhance private sector engagement to communicate obligations and risks
- Potentially amend the Bank Secrecy Act (BSA), anti-tip-off statutes, and laws against unlicensed money transmitting to apply explicitly to digital asset service providers
- Potentially raise the penalties for unlicensed money transmitting
- Amend federal statutes to let the Department of Justice (DOJ) prosecute digital asset crimes in any jurisdiction where a victim of those crimes is found.
Related to this objective to combat illicit finance and foster responsible and legitimate innovation in the sector, the following reports pursuant to the Order and related developments are of note:
- Treasury issued Crypto-Assets: Implications for Consumers, Investors, and Businesses
- Treasury issued The Future of Money and Payments
- Treasury issued an Action Plan to Address Illicit Financing Risks of Digital Assets
- Treasury issued a Request for Information (RFI) on illicit activity and national security risks related to digital assets.
- Treasury will complete an illicit finance risk assessment on decentralized finance (DeFi) by the end of February 2023 and an assessment on non-fungible tokens (NFTs) by July 2023
- The DOJ published a report on The Role of Law Enforcement in Detecting, Investigating, and Prosecuting Criminal Activity Related to Digital Assets. The report delineates the various categories of illicit use cases using digital assets, and encourages deterrence of fraud through increased investigation and aggressive enforcement. The new report is a companion to the International Law Enforcement Cooperation Report and serves as an update to the Cryptocurrency Enforcement Framework.
- The DOJ also announced the establishment of the Digital Asset Coordinators (DAC) Network. It also announced the federal prosecutors from US Attorneys’ Offices nationwide and the department’s litigating components who will serve as their office’s subject-matter experts on digital assets.
Protecting Consumers, Investors, and Businesses
In order to address and mitigate the risks that digital assets pose to consumers, investors, businesses, equitable economic growth, and the larger financial system, the Framework “encourages” the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to “aggressively pursue investigations and enforcement actions against unlawful practices in the digital assets space.” It also “encourages” the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC) to “redouble their efforts to monitor consumer complaints.” Furthermore, the Framework encourages agencies to:
- issue guidance and rules to address current and emergent risks;
- collaborate to address acute digital assets risks facing consumers, investors, and businesses;
- share data on consumer complaints regarding digital assets; and
- engage in public-awareness efforts to help consumers understand the risks involved with digital assets.
Promoting Access to Safe, Affordable Financial Services
In order to foster financial system inclusion and promote services that are secure, reliable, affordable, and accessible to all, the Framework encourages agencies to:
- support the development and use of innovative technologies by payment providers to increase access to instant payments (e.g., the Board of Governors of the Federal Reserve System’s (FRB) soon-to-be deployed FedNow, a 24/7 interbank clearing system);
- use instant payment systems for their own transactions when appropriate;
- consider making recommendations to the president on the potential regulation of nonbank payment providers; and
- prioritize efforts to improve the efficiency of cross-border payments.
Advancing Responsible Innovation
The Order directed agencies to take concrete steps to support technological advances in the responsible development, design, and implementation of digital asset systems while prioritizing privacy, security, combating exploitation, and reducing negative environmental impacts. Under the Framework, Treasury and financial regulators in particular are further encouraged to provide regulatory guidance, best-practices sharing, and technical assistance to innovative firms, including through tech sprints and dedicated communication channels.
Reinforcing US Leadership in the Global Financial System and Economic Competitiveness
In order to drive US competitiveness and leadership in digital asset technologies while promoting US values (e.g., democracy, the rule of law, free markets, privacy, consumer protection, financial stability, environmental sustainability, etc.), the Framework encourages agencies to:
- leverage US positions in international organizations to communicate US values related to digital assets;
- expand leadership roles on digital assets work at international organizations and standard-setting bodies;
- increase collaboration with partner agencies in foreign countries;
- explore technical assistance to developing countries building out digital asset infrastructure and services; and
- help fintechs and digital asset firms enter and thrive in global markets.
Related to this objective, the Department of Commerce issued its report pursuant to the Order on Responsible Advancement of US Competitiveness in Digital Assets, addressing how the US can reinforce its leadership in the global financial system as well as foster technological and economic competitiveness. The report is organized around four priorities:
- Ensuring effective regulatory approaches and addressing regulatory gaps
- International engagement and trade promotion
- Meaningful public-private engagement
- Sustained US leadership in technological research and development (R&D)
Exploring a Central Bank Digital Currency (CBDC)
The Framework points to the potential for “significant benefits” from a US CBDC, including that a CBDC could enable a payment system that is “more efficient, provides a foundation for further technological innovation, facilitates faster cross-border transactions, and is environmentally sustainable.” Indeed, the Order had urged the FRB to place the “highest urgency” on research and development of a CBDC. Actual implementation, however, does not appear to be on an accelerated timeframe. In its report pursuant to the Order on the prospects of a US CBDC, the White House Office of Science and Technology Policy discussed the policy objectives, technical challenges, and wider impact of launching a CBDC, but remained neutral on the fundamental question of whether the US should issue a CBDC.
The Framework encourages the FRB to “continue its ongoing CBDC research, experimentation, and evaluation” — language that signals deliberation rather than urgency. Alongside the FRB’s efforts, the Framework indicates that a Treasury-led interagency working group will be established to consider policy implications of a potential CBDC, leverage cross-government technical expertise, and share information with partner organizations.
Officials Comment on the Framework
- According to a statement by Treasury Secretary Janet Yellen, the reports that make up the Framework “clearly identify the real challenges and risks of digital assets used for financial services … if these risks are mitigated, digital assets and other emerging technologies could offer significant opportunities.”
- Brian Deese, National Economic Council director, and Jake Sullivan, national security advisor, published a joint statement noting that the Framework lays “the groundwork for a thoughtful, comprehensive approach to mitigating digital assets’ acute risks and—where proven—harnessing their benefits.”
The Bumpy Road Ahead
The Framework, like the Order itself, does not tackle specific technical issues head-on and does not fundamentally change the current digital asset regulatory landscape in the US. The Framework clearly shows the White House’s desire for agency cooperation and coordination to address the key priorities under the Order, but such cooperation and coordination only goes so far in the absence of better defined statutory authorities and regulatory remits. As the Framework does not explicitly assign jurisdiction or seek to categorize and classify digital assets (for example, as securities versus commodities), there is a continuing perceived need for legislation and/or regulation to draw clearer lines in the sand.
The White House describes the various reports giving rise to the Framework as collectively “articulat[ing] a clear framework for responsible digital asset development.” A framework, however, does not make a home, and many in the industry will likely find the Framework does little to clarify the current state of digital asset regulation in the US. The Framework does seek to “pave the way for further action at home and abroad” — insofar as regulators and lawmakers are committed to moving forward on the principles the Framework articulates.
It also purports to promote innovation in the sector, but “at the same time, [the reports] call for measures to mitigate the downside risks, like increased enforcement of existing laws.” To many market participants, these two policy objectives are at a loggerheads. Indeed, while the Framework calls for further guidance from the regulators, SEC Chairman Gensler, for example, continues to loudly insist that such guidance is unnecessary in the securities context, and examples of perceived regulation by enforcement on the part of multiple regulators continue to proliferate. To the extent that agency jurisdiction and the availability of guidance remains contentious, innovators will continue to feel the chilling effect of a Framework without walls.
Latham & Watkins will continue to report on developments around the White House digital asset framework. If you have questions about this post, please contact one of the authors or the Latham lawyer with whom you normally consult.
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