The Foreshadowing of Digital Asset Regulation: The White House’s First Comprehensive Framework For The Regulation of Digital Assets
On September 16, 2022, the White House released its first comprehensive framework for the regulation of digital assets (the “Framework”). Although the Framework does not create any new laws, it does foreshadow an inevitable regulation matrix.
Back in March, 2022, President Joe Biden came out with his Executive Order on Ensuring Responsible Development of Digital Assets (the “Executive Order”). Our comments on the Executive Order can be found here. In the Executive Order, President Biden tasked various government departments and agencies with studying digital assets and developing a framework for their regulation.
Now, and in response to the Executive Order, the White House has published the Framework. The Framework does not create any new laws, but it does outline the recommendations of these government departments and agencies with respect to the regulation of digital assets and gives us a glimpse of what is to come. The Framework can be found here.
The Recommendations
The Framework’s recommendations were broken down into seven different areas.
First, Protecting Consumers, Investors and Businesses and second, Fighting Illicit Finance. Under these mandates, the government highlights the volatile price of digital assets and the propensity for scams and fraudulent activities in the space. In order to address these concerns, the Framework encourages regulators in the digital space to “aggressively pursue investigations and enforcement actions…”
Similarly, the Framework encourages the issuance of guidance and rules to address risks in the digital asset ecosystem. Through these steps, the government is focused on both educating the public and stabilizing the ecosystem by decreasing the number of bad actors in the space.
It will be interesting to see how this plays out in practice and if regulators will focus on pursuing larger players operating in the grey area of the space, as we see with the SEC v Ripple/XRP saga and the question of, is it a security? Or, will regulators focus on the clear-cut scammers and fraudulent actors in the space. Personally, I would like to see more emphasis on the pursuit of scammers perpetrating rug pulls and other fraudulent activities. It is these actors that are undermining the market and, to a large extent, preventing it from achieving legitimacy amongst the masses.
Third, Promoting Access to Safe, Affordable Financial Services. In this section, the government acknowledges that the current financial model does not work for everyone and that it is costly and slow (no need to remind us fans of Web3 and crypto of this). In order to remedy this, and with respect to the digital asset ecosystem, the government is pledging to back research into digital asset ecosystems to ensure that they are usable, inclusive, equitable and accessible to all. As part of this, the President will consider recommendations to create a federal framework to regulate nonbank payment providers. Although this all seems very vague, I think we can assume that it is tied to points one and two above and another example of the government looking to bring stability to the ecosystem by rooting out bad actors.
Fourth, Fostering Financial Stability. In highlighting the need for stability, the government focuses on the May, 2022 fall of “stablecoin” TerraUSD and the subsequent $600 billion crash. In order to combat instability and bring order to the ecosystem, the government is committing to work with financial institutions to bolster their capacity to identify and mitigate cyber vulnerabilities and to support agencies in identifying, tracking and analyzing risk in the digital asset ecosystem. Although these strategies seem to be lacking specifics, we can read them to mean that projects will be facing increased scrutiny and, as is currently proposed for stable coins, need to provide proof of backing.
Fifth, Advancing Responsible Innovation and sixth, Reinforcing Our [USA] Global Financial Leadership and Competitiveness. In discussing these areas, the government states that the USA is a leader in innovation, the global financial system (including with respect to digital assets) and that it intends to maintain this position. In terms of innovation, the government will be backing research on next-generation cryptography and will provide technical assistance to US firms developing new financial technologies. In terms of its international leadership, the Framework states that the USA will be using its international stature to communicate its position on digital assets to other international players and to work with these players. For Web3 and crypto fans, this is certainly good news as the USA’s desire to be a leader in the digital asset ecosystem means that it is taking the issue seriously and will promote, rather than stifle, projects and innovation.
Seventh, Exploring a U.S. Central Bank Digital Currency (CBDC). In the Framework, the government recognized the potential for a digital form of the US dollar as a means to achieve the above stated goals. Although the government states that further research is needed before the implementation of a CBDC, it does list the goals and objectives of any potential CBDC. These goals being to: protect consumers, promote economic growth, improve payment systems, provide interoperability with other platforms, advance financial inclusion, protect national security, respect human rights and align with democratic values.
Conclusion
As a regulatory matrix draws nearer, and although the devil will be in the details, I think the Framework gives a glimmer of optimism. If the US wanted to squash the digital asset ecosystem, it would likely not commit to spending money on researching next-generation cryptography or sharing new technologies with firms developing the next generation of financial technologies. Further, the US government seems to recognize that if they aren’t a leader in this space, someone else will be more than happy to step-up and reap the benefits — leaving the US to play a lesser role. Although time will tell, I think the Framework foreshadows an exciting period of innovation in the digital asset ecosystem.
