Biden Administration maps out the Digital Assets Future…but how much time it takes to actually get to an overarching US digital asset policy is anyone’s guess

On March 9, 2022, U.S. President Joe Biden issued an executive order “On Ensuring Responsible Development of Digital Assets” (the Order). The key message of the Order is that the United States cannot ignore the growing development and adoption of digital assets and related innovations and measures need to be taken to resolve the current inconsistent and fragmented approach to the regulation of digital assets. In line with this, we would expect more regulation, more international cooperation on regulation, but what form or shape this will take, we will have to wait and see.

If you are keen to review the entire 5,000 Order, here is a link to the full text.

The Order does cover a lot of ground by listing key focus areas and outlining an agenda for action. The key areas are: (a) consumer protection; (b) financial stability; © use of digital assets for illegal activities; (d) development of CBDCC (or digital dollar); (e) lowering costs of access to financial services; and (f) promoting responsible innovation to reduce negative environmental impact of cryptocurrency mining.

The Order has triggered a mixed reaction from the crypto/digital-asset enthusiasts. Some feel that the Order is broad and vague, and often mirrors the reservations of the Biden admin against anything crypto-related. Others welcome the Order as a coming of age — a much awaited directive which mobilizes resources and commits to a whole-of-government roadmap for future regulatory activities.

My personal view is that on balance we should be optimistic about the Order and take it as a signal to the fintech/digital asset community that the US Government intends to actively engage on this issue, in order to promote robust standards and set a level playing field. But, how much time it actually takes for a formal, comprehensive US digital asset policy to emerge is anyone’s guess.

What does this mean? Implications?

With respect to consumer protection and ensuring financial stability, digital assets platforms and other intermediaries could be expected to be subject to regulatory and supervisory standards similar to those that govern existing financial market infrastructures and financial firms based on the principle “same business, same risks, same rules”.

The Order acknowledges the international nature of digital assets. In the context of use of digital assets for illicit activities, the Order notes that “poor or nonexistent implementation of [anti-money laundering and countering the financing of terrorism standards] in some jurisdictions can present significant illicit financing risks.” The United States is expected to adopt regulatory, governance and technological measures to counter illicit activities and preserve or enhance the efficacy of the national security tools.

With respect to CBDCs, the Order notes that “the United States derives significant economic and national security benefits from the central role that the [USD] and [US] financial institutions and markets play in the global financial system.” The Order highlights that digital currencies “may have the potential to support efficient and low-cost transactions, particularly for cross-border funds transfers and payments”. To address technological and regulatory issues, such as international design of CBDCs, interoperability and financial stability, the US is expected to work with international counterparties through G7, G20, Financial Stability Board and FATF. The Order instructs the US Agency for International Development and the heads of other relevant agencies to establish a framework for interagency engagement with foreign counterparts and in international for a to adapt global principles and standards for how digital assets are used and transacted.

What I like about the Order:

1. the Order is the first coordinated federal digital asset strategy for the US,
2. the Order acknowledges that the existing regulatory regime is fragmented and restrictive,
3. it is extensive, setting out six key areas and commits to a specific timeline.

Where I see ambiguity:

1. timing,
2. principle of “same business, same risks, same rules”,
3. unclear how to work around current fragmentation of regulatory regimes,
4. potential design and deployment of a US CBDC,
5. leveling the playing field — in the US and internationally.

The order tables various timelines for the involved U.S. government agencies to provide reports and assessment of the required changes in laws and policy relating to the abovementioned key areas. According to the Order, an interagency process will be coordinated by the Assistants to the President for National Security Affairs and for Economic Policy.

My key takeaway is that we should expect increased government activity relating to research and reporting, policy making and regulation. And we would probably expect that the regulation will replicate the existing regulatory framework for traditional finance trying to take into account for particular nature of blockchain. We would also see increased efforts on international cooperation. What is less clear is how the existing fragmentary approach would be resolved. Different government agencies, like CFTC, SEC, Treasury Board have their own approaches to understanding and treatment of digital assets, and whether there would be a unified approach with less or more regulation is an open question.

In Canada, I would expect a wait-and-see approach from the Canadian securities regulators. FINTRAC Canada might come up with their own initiatives. The Bank of Canada has been at the forefront of research and development of pioneering research on digital assets and we have seen a number of research papers and publications exploring digital assets and digital financial infrastructure, including CBDCs, so we could expect that Canada could take a lead in the development of the architecture to allow introduction of digital currencies.