FROM UNCERTAINTY TO CLARITY: A GUIDE TO U.S. REGULATION OF DIGITAL ASSETS

Exciting news for crypto enthusiasts! The US government has introduced a robust framework for the cryptocurrency market that promises enhanced safety, openness, and predictability. Brace yourself for a market that prioritizes consumer protection and bids farewell to the uncertainties of price fluctuations and unlawful practices. Get ready for a brighter future in crypto!

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State regulators worldwide are working towards establishing a unified legal framework for the industry to tame the “wild west” reputation. The US government made a significant move forward with releasing its first-ever Comprehensive Framework for Responsible Development of Digital Assets. on September 16, 2022.

The document outlines six critical elements of digital asset regulation and establishes new frameworks to address critical issues. While cryptocurrency regulation is ongoing, this framework indicates positive progress towards a more stable and trustworthy market. Stay updated with our latest piece!

FACTS ABOUT DIGITAL ASSETS

What is driving the U.S. authorities’ intention to regulate digital assets?

• Rapid growth in the market: Millions of people, including 16% of adult Americans, have purchased digital assets.
• Market capitalization: The global market capitalization was $3 trillion in November 2011.
• Potential opportunities and risks: Digital assets present opportunities for leadership and technology advancement but also pose real risks. The recent crash of a stablecoin resulted in the loss of over $600 billion.

HOW THE REGULATION WAS DEVELOPED

On March 9, 2022, the U. S. government issued an Executive Order (EO) to recognize the potential of digital assets and take action to ensure their responsible development. Accordingly, the EO outlines six objectives to fulfill its aim:

• protect consumers and investors;
• promote financial stability;
• combat illicit finance;
• establish U. S. leadership in global finance;
• ensure financial inclusion;
• promote responsible innovation.

To reflect these ambitions, various governmental bodies collaborated in drafting a framework for the digital asset market’s development, laying out the policy recommendations necessary for the EO’s successful implementation.

THE CONSUMER SECTOR: CHALLENGES AND SOLUTIONS

Digital assets come with risks that pose a threat to consumers, investors, and businesses. According to the FBI, reported monetary losses from digital asset scams increased by 600% in 2021. Volatility in prices, fraudulent practices, non-compliance with laws, and misleading information are some of the problems that need to be solved.

What are the steps to protect consumers, investors and businesses?

1. The Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) will take strict enforcement action against any illegal practices.
2. The Consumer Financial Protection Bureau (CFPB) and Federal Trade Commission (FTC) will closely monitor consumer complaints and enforce measures against unfair or abusive practices.
3. The agencies will introduce rules, provide guidance, and collaborate to maximize their effectiveness.
4. The Financial Literacy Education Commission (FLEC) will lead public education initiatives to ensure the public knows the risks associated with digital assets.

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FINANCIAL SECTOR: PROMOTING FINANCIAL INCLUSION

Traditional finance has left too many Americans without access to essential financial services, with costly payment methods and services that do not meet their needs. Digital assets can help make payments faster, cheaper, and more accessible. However, the authorities must ensure that they benefit consumers and compete fairly with traditional financial systems.

The government plans to launch FedNow in addition to The Clearinghouse’s Real Time Payments system to provide secure, reliable, affordable, and accessible financial services for all Americans.

Agencies will also encourage the adoption of instant payment systems and improve the efficiency of cross-border payments. The National Science Foundation (NSF) will fund research to ensure that digital asset ecosystems are designed to be usable, inclusive, equitable, and accessible to all.

RESPONSIBLE INNOVATION: CHALLENGES OF NEW REGULATION

Why is it important to regulate digital assets?

• The U.S. leads in innovation, including digital asset firms.
• Many of the world’s most valuable fintech companies are in the U.S.
• The U.S. government supports responsible private-sector innovation and mitigating negative technological consequences.

What are the steps to promote responsible innovation in digital assets?

1. The Office of Science and Technology Policy (OSTP) and NSF will develop a Digital Assets Research and Development Agenda to study cryptography, transaction programmability, cybersecurity and privacy, and the environmental impacts of digital assets.
2. NSF will fund research to educate stakeholders on responsible digital asset use. Treasury and financial regulators will provide guidance, best practices, and assistance to fintech firms.
3. Departments of Energy and Environmental Protection (DEEP) will track and mitigate the environmental impact of digital assets.
4. The Department of Commerce will establish a forum to exchange ideas and knowledge to inform federal regulations and standards.

STRENGTHENING FINANCIAL LEADERSHIP: THE CHALLENGES OF NEW REGULATION

What principles are behind the White House’s goal to establish clear regulations for digital assets?

• Global standard-setting bodies are establishing policies, guidance, and regulatory recommendations for digital assets.
• The US is actively participating in this process while strengthening its position in the global financial system.
• The US aims to support the development of digital assets in other countries by ensuring their financial, legal, and technological infrastructures align with core values such as data privacy, financial stability, and human rights.

What are the steps to reinforce financial leadership and competitiveness?

1. Expand US leadership in digital assets by playing a leading role in international organizations and standard-setting bodies.
2. Increase collaboration with foreign countries to assist partner agencies in building digital asset infrastructure and services.
3. Provide technical assistance to developing countries to build digital asset infrastructure and services.
4. Help US firms expand globally by supporting their search for new markets.

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ILLEGAL TRANSACTIONS: ISSUES TO BE ADDRESSED BY REGULATION

Why does the US want to regulate digital assets in terms of illegal transactions?

Bad actors have used digital assets to carry out illicit activities such as money laundering, terrorism financing, and drug trafficking.

What are the US actions to reduce risks?

• Adopt clear regulation.
• Implement strict regulatory oversight.
• Involve law enforcement agencies in checking suspicious transactions.

What are the steps to stop illegal funding?

1. Evaluate the need to amend existing laws, such as the Bank Secrecy Act (BSA) and anti-tip-off statutes, to apply to digital asset service providers.
2. Continue monitoring the digital assets sector and its associated illicit financing risks to identify gaps in its legal, regulatory, and supervisory regimes.
3. Expose and disrupt illicit actors, hold cybercriminals responsible for their illicit activity, and identify nodes in the ecosystem that pose national security risks.
4. Enhance dialogue with the private sector to ensure that firms understand their existing obligations and the risks associated with digital assets.

Overall, the White House aims to regulate digital assets to promote responsible innovation, reinforce financial leadership and competitiveness, and reduce risks associated with illegal transactions. To achieve these goals, they plan to conduct research, provide guidance, monitor the sector, and involve law enforcement agencies in checking suspicious transactions.

CBDC: TO BE OR NOT TO BE

The buzz around central bank digital currency (CBDC) is heating up, with talks of a digital dollar on the horizon. According to — Ronit Ghose, Head of Fintech and Digital Assets at Citi Global Insights, “A dollar in CBDC form is a liability of the central bank. The Federal Reserve has to pay you back.”

Ronit Ghose

So, what are the benefits of a digital dollar?

For starters, it could enable a more efficient payment system, encourage financial inclusion, and promote economic growth and stability. It could also protect against cyber and operational risks, safeguard sensitive data, and minimize risks of illicit financial transactions. Not to mention, a U.S. CBDC could help preserve U.S. global financial leadership.

The U.S. Administration has outlined vital policy objectives for a CBDC system, including consumer protection, improved payment systems, and national security. The Treasury will lead an interagency working group to consider the implications of a U.S. CBDC.

Yuriy Brisov

This article was written by Yuriy Brisov of Digital & Analogue Partners. Visit dna.partners to learn more about our team and the services.

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