White House Issues Framework for Regulation of Digital Assets, Treasury Issues Crypto Reports and Request for Comment

Practical Law Legal Update w-036-9720 (Approx. 9 pages)

White House Issues Framework for Regulation of Digital Assets, Treasury Issues Crypto Reports and Request for Comment

by Practical Law Finance

White House Framework for Regulation of Digital Assets

The White House fact sheet reflects the content of nine separate reports submitted by various stakeholders, primarily relevant regulatory agencies and departments, including Treasury and Department of Justice (DOJ). The fact sheet expressly focuses on seven issues:

Protecting consumers, investors, and businesses to ensure fair play in digital assets markets by encouraging relevant federal regulatory agencies to issue guidance, increase enforcement resources, and aggressively pursue fraudulent actors.
Promoting access to safe, affordable financial services by supporting the development and use of innovative technologies by payment providers.
Fostering financial stability by encouraging Treasury to work with financial institutions to bolster their capacity to identify and mitigate cyber vulnerabilities and with other agencies to identify, track, and analyze emerging strategic risks that relate to digital asset markets.
Advancing responsible innovation through the Office of Science and Technology Policy (OSTP) and National Science Foundation (NSF) to develop a digital assets research and development agenda while reinforcing global financial leadership and competitiveness by leveraging US positions in international organizations to message US values related to digital assets.
Fighting illicit finance through regulation, oversight, law enforcement action, and the use of other US government authorities.
Exploring a US central bank digital currency (CBDC) to enable a payment system that is more efficient, provides a foundation for further technological innovation, facilitates faster cross-border transactions, and is environmentally sustainable.

The final section of the fact sheet explores CBDC policies and reports that the Biden administration has developed policy objectives surrounding a digital dollar but does not yet recommend a US CBDC, noting that further research and development on the technology that would support a US CBDC is needed.

The fact sheet urges the SEC and the CFTC to both:

Issue guidance and rules for digital asset ecosystem risks, including the potential for cryptocurrencies to be used in money laundering or for fraud.
Aggressively pursue investigations and enforcement actions against unlawful practices in the digital asset space.

The fact sheet also reported that President Biden would consider asking Congress to:

Amend the Bank Secrecy Act (BSA) to apply to digital asset service providers, including exchanges and platforms for non-fungible tokens (NFTs).
Raise penalties for unlicensed money transmitting to match the penalties for similar crimes under other money laundering statutes.
Amend relevant federal statutes to let DOJ prosecute digital asset crimes in any jurisdiction where a victim of those crimes is found.

Treasury Reports in Response to Biden Executive Order on Digital Assets

On September 16, 2022, Treasury announced publication of the following three reports under the President's EO 14067.

Future of Money and Payments

Future of Money and Payments (money and payments report) addresses the future of money and payments, reviews the current system of money and payments, as well as developments in instant payments and stablecoins, and details design choices for a potential CBDC in the context of public policy considerations supporting US global financial leadership, advancing financial inclusion and equity, and minimizing risks. According to the report a US CBDC would:

Be legal tender.
Be convertible one-for-one into reserve balances or paper currency.
Clear and settle with finality nearly instantly, similar to transfers of reserve balances over Fedwire or the FedNow Service, or payments with paper currency.

The money and payments report notes that recent innovations in money and payments, including instant payment systems and stablecoins, could have far-reaching implications because:

Instant payment systems generally preserve the core features of existing money and payment systems, while offering faster, more efficient, and potentially more inclusive ways to pay.
Stablecoins aspire to be a new type of money supported by a novel payments technology, with implications for the payment system that are more difficult to predict.

In order to improve the US system of money and payments to best achieves a range of policy goals, the money and payments report recommends:

Undertaking advance work on a possible US CBDC, in case one is determined to be in the national interest.
Encouraging use of instant payment systems to support a more competitive, efficient, and inclusive US payment landscape.
Establishing a federal framework for payments regulation to protect users and the financial system, while supporting responsible innovations in payments.
Prioritizing efforts to improve cross-border payments.

Crypto-Assets: Implications for Consumers, Investors, and Businesses

Crypto-Assets: Implications for Consumers, Investors, and Businesses (crypto-assets report) addresses the implications for consumers, investors, and businesses (specified groups) of crypto assets by offering an overview of the crypto-asset ecosystem, trends, uses, and opportunities, then detailing exposure for the specified groups and, finally, highlighting opportunities and risks and their potential disparate impacts on vulnerable populations. The crypto-assets report recommends that relevant agencies adopt a multi-part approach to address risks associated with the crypto-asset sector using their existing authorities. The crypto-asset report identifies the following four relevant risks:

Conduct risks, including fraud, theft, and mismanagement, information asymmetry, and lack of transparency.
Operational risks, including general features and decentralized governance, security and scalability tradeoffs and de-anonymization, and peer-to-peer verification, mining pools, and validation incentives.
Risks in crypto-asset intermediation, including resources-and-capabilities risks as well as custody risks.
Risk exposures related to regulatory noncompliance and evolving market oversight, including effects of legal and regulatory noncompliance and effects of changes in the scope and application of laws and regulations.

Consistent with the objectives in the EO 14067, the crypto-asset report recommends a multi-pronged approach that builds on and complements other recommended actions as described in the President’s Working Group on Financial Markets (PWG) Report on Stablecoins as well as other reports issued under the EO 14067 (see Legal Update, President's Working Group on Financial Markets Issues Report Supporting Federal Regulation of Stablecoins and Urging Congressional Action) as well as the report on the future of money and payments (see Future of Money and Payments).

Action Plan to Address Illicit Financing Risks of Digital Assets

Action Plan to Address Illicit Financing Risks of Digital Assets (action plan) sets out key financial risks and challenges presented by digital assets and defines US federal priorities going forward. The action plan expressly states that it responds to Section 7(c) of EO 14067, which calls for the development of a coordinated inter-agency action plan for mitigating digital asset related illicit finance and national security risks as identified in the US government’s national strategy for combating terrorism and other illicit financing set out by Treasury’s National Risk Assessments (NRAs).

Some key illicit finance vulnerabilities noted in the action plan include global gaps across countries as some virtual assets service providers (VASPs) operate in jurisdictions with weak anti-money laundering (AML) and countering-financing-of-terrorism (CFT) regimes. The action plan lays out priorities and supporting actions to which the US government is committed including:

Monitoring emerging risks.
Improving global AML/CFT regulation and enforcement.
Updating BSA regulations.
Strengthening US AML/CFT supervision of virtual asset activities.
Holding accountable cybercriminals and other illicit actors.
Engaging with the private sector.
Supporting US leadership in financial and payments technology.

The action plan also reports risks associated with anonymity-enhancing technologies such as mixers and privacy coins, as well as disintermediation, in which chain-hopping, unhosted wallets, and peer-to-peer transfers present elevated risks as they obfuscate the flow of funds.

Treasury Request for Comment

The Treasury RFC seeks input and information from the private sector on illicit finance and national security risks posed by digital assets and asks the private sector to highlight any gaps in Treasury's action plan for combating digital-asset based illicit finance (see Action Plan to Address Illicit Financing Risks of Digital Assets). In the RFC, Treasury asks 24 questions relating to AML/CFT and related matters including two questions that seek input on the illicit finance risks posed by NFTs, decentralized finance (DeFi), and peer-to-peer payment technologies.

The RFC also seeks information on:

Any key illicit financing risks that Treasury has not raised in its action plan or its NRAs.
Input on potential regulatory changes that would help better mitigate illicit financing risks associated with digital assets.
How Treasury can maximize the development and use of emerging technologies like blockchain analytics, travel rule solutions, or blockchain native AML/CFT solutions, to strengthen AML/CFT compliance related to digital assets.

Public comment on the RFC must be received on or before November 3, 2022.

This update is based in part on material provided by Thomson Reuters Regulatory Intelligence (TRRI).

White House Issues Framework for Regulation of Digital Assets, Treasury Issues Crypto Reports and Request for Comment | Practical Law