Takeaways

• The Executive Order on Ensuring Responsible Development of Digital Assets (EO) recognizes the significant impact that cryptocurrencies, digital assets and blockchain technology have had and will have on financial services and acknowledges that the United States has an interest in promoting responsible innovation and mitigating risks in these new markets.
• The EO expresses an intention of the United States to develop a coordinated federal approach to understanding the opportunities and risks of digital assets, and regulating digital assets.
• The EO calls for research to explore potential design and deployment options for a U.S. central bank digital currency (CBDC) if doing so is deemed to be in the national interest.
• The EO defines the following terms: blockchain, central bank digital currency, cryptocurrencies, digital assets and stablecoins.
• The EO orders multiple agencies to evaluate the impact of digital assets and possibly enhance investor and market protections, which may lead to increased enforcement actions against companies that operate in these markets.

Overview

On March 9, 2022, President Joe Biden signed the Executive Order on Ensuring Responsible Development of Digital Assets (EO) and the White House released a corresponding fact sheet summarizing related key policy objectives. As discussed in more detail below, this is a landmark moment for the U.S. cryptocurrency market. 

The Objectives

The EO lays out a national policy for digital assets, with six key objectives:

1. Consumer, Business and Investor Protection

Consumer Protection Is a Priority. The EO states that digital assets create new and increased risks of certain crimes and other legal violations, privacy and data breaches, unfair and abusive acts or practices, and other cyber incidents faced by consumers, investors and businesses, and it extensively focuses on the need for oversight, standards and consumer protection. (Secs. 2(a) and 5(a).)

2. Financial Stability and Mitigation of Systemic Risk

Digital Asset Businesses Should Be Regulated. The EO notes that certain digital asset trading platforms and service providers operate outside of the U.S. regulatory regime and specifies that they, along with digital asset issuers and intermediaries, should be regulated as “traditional market infrastructures and financial firms.” (Sec. 2(b).)

3. Mitigate National Security and Illicit Finance Risks

Digital Assets May Pose Significant Illicit Finance Risks. The EO states that digital assets may be misused to achieve criminal purposes such as money laundering, terrorism and proliferation financing, fraud and theft schemes, corruption, cybercrime and ransomware, narcotics, human trafficking, and the circumvention of U.S. and foreign financial sanctions. (Secs. 2(c) and 7(a).)

Regulation and Enforcement Are Key. The EO calls for a significant increase in regulation, oversight and law enforcement actions to mitigate illicit finance and risks to national security. (Sec. 7(a).)

More Controls and Accountability Needed. The EO notes the growth in “decentralized financial ecosystems, peer-to-peer payment activity, and obscured blockchain ledgers” and advocates for the development of controls and accountability to “mitigate illicit finance and national security risks” and “to promote high standards for transparency, privacy, and security.” (Sec. 2(c).)

4. Promotion of U.S. Leadership and Competitiveness in the Global Financial System

The United States Will Seek International Cooperation. According to the EO, “[u]neven regulation, supervision, and compliance across jurisdictions creates opportunities for arbitrage and raises risks to financial stability and the protection of consumers, investors, businesses, and markets” in the United States and abroad. For example, the EO notes that “[i]nadequate AML/CFT [anti-money laundering/combating the financing of terrorism] regulation, supervision, and enforcement by other countries challenges the ability of the United States to investigate illicit digital asset transaction flows that frequently jump overseas, as is often the case in ransomware payments and other cybercrime-related money laundering.” (Sec. 8(i).)

5. Promotion of Financial Inclusion

Calls for Equitable and Affordable Financial Services. The EO discusses the need for safe, affordable and accessible financial services, and for mitigating disparate impact of financial innovations on Americans. (Secs. 2(e) and 5(a).)

6. Ensuring Responsible Innovation

Calls for Regulation to Ensure Responsible Innovation. “The United States has an interest in ensuring that digital asset technologies and the digital payments ecosystem are developed, designed, and implemented in a responsible manner that includes privacy and security” and “defend[s] against illicit exploitation, and reduces negative climate impacts.” (Sec. 2(f).)

Leaves “Responsible Innovation” Undefined. The EO leaves open the questions of what “responsible innovation” means and who decides whether this standard has been met.

US CBDC

The United States Will Seriously Evaluate a CBDC. “[The] Administration places the highest urgency on research and development efforts into the potential design and deployment options of a United States CBDC. These efforts should include … actions required to launch a United States CBDC if doing so is deemed to be in the national interest.” (Sec. 4(a)(i).) The EO also urges the Federal Reserve to continue its CBDC research and development efforts and to develop a plan to support government action related to these efforts.

The Interagency Reports

The EO orders various U.S. agencies and interagency groups to submit numerous reports within 90, 120, 180 or 210 days addressing digital assets. The reports broadly address CBDCs, consumer and economic opportunities and risks of digital assets, and combating illicit activity involving digital assets. Details on the reports can be found here.

Key Definitions

The EO provides definitions of the following terms: blockchain, central bank digital currency, cryptocurrency, digital assets and stablecoins. Of particular note are the definitions of cryptocurrencies and digital assets.

According to the EO, cryptocurrency “refers to a digital asset, which may be a medium of exchange” and which is underpinned by cryptography. This definition appears to be similar to the definition of “convertible virtual currencies” articulated by the U.S. Financial Crimes Enforcement Network.[1] 

In contrast, the EO defines digital assets as “all CBDCs, regardless of the technology used” and specifically includes cryptocurrencies and stablecoins in the definition of digital assets. The definition states, “Regardless of the label used, a digital asset may be, among other things, a security, a commodity, a derivative, or other financial product.” This broad definition appears to focus on CBDCs and assets that fall under the regulatory authority of the U.S. Securities and Exchange Commission and/or the U.S. Commodity Futures Trading Commission. 

Conclusion

The EO has been viewed as a game changer for digital assets and blockchain technology. Specifically, some commentators are hopeful that a comprehensive federal approach will help streamline regulation and minimize potential jurisdictional overlap that may stifle innovation. Other commentators are concerned that numerous time-consuming studies, as directed in the EO, will lead to lengthy delays in moving forward with a coordinated regulatory regime. The BakerHostetler Blockchain Technologies and Digital Assets team has members across all of our core groups, and our attorneys have extensive experience across all sectors of the blockchain and cryptocurrency markets, including investigations, securities law, commodities law, BSA/AML compliance, tax, privacy, transactions, advertising law, intellectual property and technology design as well as government affairs, public policy and advocacy across federal departments and agencies and Congress. Please feel free to contact any of our experienced professionals if you have questions about this alert.

[1] FIN-2019-G001 (“‘virtual currency’ refers to a medium of exchange that can operate like currency but does not have all the attributes of ‘real’ currency, as defined in 31 CFR § 1010.100(m), including legal tender status … [convertible virtual currency] is a type of virtual currency that either has an equivalent value as currency, or acts as a substitute for currency, and is therefore a type of ‘value that substitutes for currency.’”)

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