President Donald Trump on January 23, 2025 issued an executive order that outlines the new administration’s commitment to strengthening US leadership in the digital asset space (the Executive Order). The Executive Order contains policies that seek to foster regulatory clarity for digital assets, among other items.
The Executive Order will initiate a flurry of action throughout the federal government. Clients subject to US Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) oversight should monitor developments in the digital asset space and participate, where possible, in the establishment of a formal digital asset regulatory framework. Early collaboration with the SEC and CFTC will be a key aspect in the development of a workable digital asset regulatory framework.
WHAT IS IN THE EXECUTIVE ORDER?
Treatment of Dollar-Backed Stablecoins
The Executive Order seeks to promote the development and growth of lawful and legitimate dollar-backed stablecoins worldwide.[1] Dollar-backed stablecoins are a type of cryptocurrency that attempts to peg its market value to the US Dollar.[2][3] In public speeches, former SEC Chair Gary Gensler distinguished between stablecoins backed by reserves of US dollars and algorithmic stablecoins and indicated his belief that some stablecoins may be akin to shares of a money market fund.[4]
The SEC also brought an enforcement action in September 2024 against the issuer and developer of a stablecoin that was purportedly backed by US dollars, alleging that the stablecoin was an investment contract that was offered without registration and that the defendants defrauded investors by claiming it was fully backed by US dollars when the assets had been invested in a speculative and risky offshore investment fund to earn additional returns for the defendants.[5]
The CFTC has taken action against stablecoins on the basis of issuer representations regarding the amount of corresponding fiat currency backing the offered stablecoins and related issues. The US Congress attempted to provide a split regulatory framework between the SEC and CFTC through the Financial Innovation and Technology for the 21st Century Act (FIT21), but it is unclear whether the new administration or Congress will adopt the proposed framework. The Executive Order does not provide clarity on a legislative solution for governing stablecoins in the United States.
Considering the initial steps taken by this Executive Order, clients should stay tuned for more updates from Congress. However, the Executive Order does make it clear that the new administration is seeking to end an era of regulation by enforcement with respect to stablecoins.
Regulatory Certainty
The Executive Order sets forth the Trump-Vance administration’s goal of providing clear and certain regulatory frameworks and jurisdictional boundaries for emerging technologies, digital assets, permissionless blockchains, and distributed ledger technologies.[6] Importantly, the Executive Order does not address how jurisdictional boundaries should be drawn between the SEC and the CFTC. The Executive Order makes no legislative endorsement, thereby leaving the leading proposed legislative framework, FIT21, in limbo.
FIT21, which passed in the House in May 2024, sought to establish joint CFTC-SEC oversight for digital assets.[7] The proposed legislation would create a more traditional regulatory framework for digital asset intermediaries that would include registration requirements, disclosure requirements, and segregation requirements, among other things. Regarding jurisdictional boundaries, the bill proposed to grant the CFTC exclusive authority over cash or spot markets for digital commodities and, separately, jurisdiction over digital assets if the blockchain, or digital ledger, on which it runs is decentralized.
In addition, it would create different digital asset categories that would determine which agency holds jurisdiction, with SEC’s overseeing of “restricted digital assets,” a category that would encompass digital assets that are not related to a decentralized network and were obtained in a capital raising distribution. Former SEC Chair Gensler issued a statement opposing the legislation, arguing, in part, that it upended well-established case law,[8] while former CFTC Chair Rostin Behnam expressed limited support for the bill, stopping short of formally recommending it.[8] Although FIT21 provides a framework for the Trump-Vance administration to consider, FIT21 was not enacted by the adjournment of the 118th Congress and it is still unclear whether the new administration will utilize or endorse any aspect of the bill.
Interestingly, the Executive Order adopted a neutral definition of “digital assets.” Executive Order section 2(a) defines the term as any digital representation of value that is recorded on a distributed ledger, including cryptocurrencies, digital tokens, and stablecoins. The Executive Order makes no mention of “investment contracts” or “commodities,” which will be key in establishing clear boundaries for the CFTC and SEC. Clients should be alert to any development in the formal definition of the term. This will likely be the battleground where jurisdictional lines between the SEC and CFTC are drawn.
Custodying Digital Assets
On the same day the order was issued, the SEC rescinded Staff Accounting Bulletin 121 (SAB 121) by issuing new Staff Accounting Bulletin 122 (SAB 122). Released in March 2022, SAB 121 provided interpretative guidance for a reporting entity that operates a platform that allows its users to transact in digital assets and that engages in activities in which it has an obligation to safeguard customers’ digital assets.
The accounting implications of SAB 121 required that a custodian that had previously concluded that it did not control the asset it safeguarded and, thus, did not need to present a liability on its balance sheet to reflect such obligation would be required present such a liability, and the related asset, at fair value on their balance sheet. Effectively, SAB 121 was seen as a prohibition on national banks and other large financial institutions custodying digital assets.
SAB 122 rescinds that prohibition and offers guidance on how an entity that has an obligation to safeguard crypto-assets for others should disclose to investors the entity’s obligation to safeguard crypto-assets held for others. Under SAB 122, an entity that safeguards crypto assets for others must evaluate whether to recognize a liability related to the risk of loss in accordance with Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) Subtopic 450-20 (Loss Contingencies). In addition to potential financial statement disclosures, SAB 122 also points reporting entities to other disclosures in their SEC filings, such as risk factors and MD&A, where an entity may need to disclose its obligations to safeguard digital assets of others. Entities that have been presenting their financial statements in accordance with SAB 121 will need to reflect the rescission of SAB 121 on a fully retrospective basis in annual periods beginning after December 31, 2024, but may elect to reflect the rescission in any earlier period.
It is possible that SAB 122 will result in national banks and other large financial institutions becoming comfortable in offering digital asset custody services to their clients, although the accounting treatment of such assets is only one consideration that such entities will take into consideration before expanding their custody business into digital assets.
Establishment of the President’s Working Group on Digital Asset Markets
Finally, the Executive Order established an inter-agency working group chaired by a special advisor for artificial intelligence (AI) and crypto appointed by the president (the Working Group). The Working Group will include both the SEC and CFTC Chairs and is tasked with proposing a regulatory framework governing the issuance and operation of digital assets, including stablecoins, in the United States.[10]
The Executive Order set forth an ambitious schedule for which the president expects certain deliverables. In particular, the Working Group must:
- Within 30 days: Identify all regulations, guidance documents, orders, or other items that impact the digital asset space and report their findings to the Chair of the Working Group (the Special Advisor for AI and Crypto) and the president.
- Within 60 Days: Each agency in the Working Group must recommend to the Chair whether the identified regulations, guidance documents, orders, or other items should be rescinded, modified, or if applicable, adopted in a regulation.
- Within 180 days: The Working Group will submit a report to the Assistant to the President for National Economic Policy with regulatory and legislative proposals that advance the policies established by the Order, including a regulatory framework proposal covering the issuance and operations of digital assets (including stablecoins), with consideration given to provisions on market structure, oversight, consumer protection, and risk management. This report will also contain an evaluation of the potential to create and maintain a national digital asset stockpile, with a proposal on criteria for establishing such a stockpile.
Notably absent from the list of agency heads that will be part of the Working Group are the heads of the banking regulators, such as the Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve. However, there is a catch-all category mentioned in the Executive Order to include heads of “other executive departments and agencies,” which may be used to add one or more of the heads of the banking regulators. The ultimate report produced by the Working Group will be critical for establishing a foundation for digital asset regulation.
Clients involved in the space, or planning to be involved in the space, should seriously consider providing feedback to the Working Group, whether directly or indirectly. Identifying fundamental issues in any report produced by the Working Group may be impactful for any future engagement with the CFTC or SEC. Clients should be prepared to provide feedback through any available forum. For example, Section 4(e) of the Executive Order leaves the door open for the Working Group to hold public hearings and receive individual expertise from leaders in digital assets and digital markets, as appropriate and consistent with the law.
In what may have been a prescient move, two days before the Executive Order was released, SEC Acting Chair Mark Uyeda, who had often been a vocal dissident of the prior administration’s stance on crypto-related matters, announced a new crypto taskforce at the agency, headed by Commissioner Hester Pierce, who the crypto community has affectionately dubbed “Crypto Mom,” with the goal of providing a “sensible regulatory path that respects the bounds of the law.” For its part, the CFTC, through Acting Chair Pham, announced the launch of a series of public roundtables on evolving trends and innovation in market structure, including digital assets.
WHAT’S NEXT?
Morgan Lewis will continue to keep clients up to date with any digital asset developments at the SEC, CFTC and with respect to the president’s Working Group.
[1] Executive Order Section 1(a)(ii).
[2] Lightstone, Steven, What 2021 Has in Store for Stablecoin (Jan. 2021).
[3] Going Digital in the UK, US, and UAE: The Latest Digital Asset Developments, Morgan Lewis Insight (Sept. 12, 2024).
[4] See Speech, “Kennedy and Crypto.”
[5] SEC, SEC Charges Crypto Companies TrustToken and TrueCoin with Defrauding Investors Regarding Stablecoin Investment Program (Sept. 24, 2024).
[6] Executive Order Section 1(a)(iv).
[7] Financial Innovation and Technology for the 21st Century Act, H.R. 4763, 118th Cong. (2023) [hereinafter FIT21].
[8] SEC, Statement on the Financial Innovation and Technology for the 21st Century
[9] For the Purpose of Receiving Testimony from the Honorable Rostin Behnam, Chairman, Commodity Futures Trading Commission: Hearing before the House Committee on Agriculture, 118th Cong. 48 (2024) (testimony of Rostin Behnam).
[10] Other Working Group members will include: (1) the Treasury Secretary; (2) the US Attorney General; (3) the Secretary of Homeland Security; (4) the Director of the Office of Management and Budget; (5) the Assistant to the President for National Security Affairs; (6) the Assistant to the President for Science and Technology; (7) the Homeland Security Advisor; and (8) the National Security Council (where matters of national security arise).
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