On September 16, 2022, the Treasury Department issued three reports pursuant to President Joseph Biden’s Executive Order 14067 of March 9, 14067 on “Ensuring Responsible Development of Digital Assets.” (For more information on the executive order, please see our previous Legal Update “Biden Executive Order Calls for Regulatory Proposals on Central Bank Digital Assets and Digital Currency.”) The issuance of the reports was followed by the Under Secretary of the Treasury for Interior Finance, Nellie Liang remarks at the Brookings Institution on September 22 explaining the reports and their recommendations.
The Treasury reports—entitled The Future of Money and Payments; Crypto Assets: Implications for Consumers, Investors and Businesses; and Action Plan to Address Illegal Financing Risks of Digital Assets—provides an overview of the operation and current uses of digital assets, the role of payment systems in the financial system and the emergence of non-bank payment systems; a discussion of the potential risks and benefits of a US central bank digital currency (“CBDC”); and an assessment of the potential use of digital assets in illicit financing. Most importantly, the reports also include recommendations to improve US policy on digital assets and to announce the Biden administration’s plans for combating the use of digital assets in illicit finance, noted below.
The Reports’ Recommendations & Action Plan
1) The future of money and payments:
- Recommendation 1: The Federal Reserve should advance work on a possible US CBDC, in case one is determined to be in the national interest.
- In support of this effort, the Treasury Department will lead an interagency working group to coordinate research and assessment of the adoption of a US CBDC.
- Recommendation 2: The US government should encourage the use of instant payment systems to support a more competitive, efficient and inclusive US payments landscape.
- Recommendation 3: A federal regulatory framework should be established for non-bank payment providers to protect users and the financial system while supporting responsible innovations in payments.
- Among Secretary Liang’s comments noted that the proposed framework should provide a common floor of minimum financial resources requirements along with state standards.
- Recommendation 4: Prioritize efforts to improve cross-border payments, including by prioritizing the roadmap for improving cross-border payments endorsed by the G20 in 2020.
2) Crypto Assets: Implications for Consumers, Investors and Businesses:
- Recommendation 1: U.S. regulatory and law enforcement authorities should, as appropriate, vigilantly pursue monitoring of the crypto-asset sector for illegal activities, aggressively pursue and expand investigations, coordinate actions between agencies, and institute civil and criminal actions to enforce applicable laws with a particular focus on consumer, investor and market protection.
- Recommendation 2: US regulatory agencies should use their existing authorities to issue supervisory guidance and rules, as needed, to address current and emerging risks in crypto-asset products and services for consumers, investors and businesses. Agencies must work together to promote consistent and comprehensive oversight.
- Recommendation 3: US authorities should work, where appropriate, individually and through the Financial Literacy and Education Commission to ensure that US consumers, investors and businesses have access to reliable information about crypto-assets.
3) Action plan to address illegal financing risks of digital assets:
- Priority Action 1: The United States will continue to monitor the development of the digital assets sector for emerging risks.
- Priority Action 2: The US government will improve regulation and enforcement in foreign jurisdictions.
- Priority Action 3: US regulatory agencies will update Bank Secrecy Act regulations to combat threats related to the development of emerging financial technologies.
- Priority Action 4: The Treasury Department will continue to engage with intergovernmental standard-setting bodies to oversee, investigate and ensure that virtual assets comply with existing AML/CFT regulatory obligations.
- Priority Action 5: The US government will introduce sanctions, special measures and other means to disrupt the illegal use of virtual assets.
- Priority Action 6: The US government will continue to engage with the private sector to ensure that it understands existing obligations as well as to learn from the private sector’s experience and assessment of risks.
- Priority Action 7: The US government will advance the modernization of US payments infrastructure by working with government agencies and US firms to promote the development and regulation of new financial technologies.
Each priority action also contained a detailed list of supporting actions.
Our Assessment
While the Treasury reports provide plenty of information about digital asset markets and the risks they may pose, they notably do not call on Congress to pass legislation to improve the US regulatory framework for digital assets. Instead, the reports encourage US regulators to use their existing enforcement and regulatory authorities to address identified risks and ensure compliance with existing legislation.
The absence of legislative recommendations was notable because Congress is actively developing legislation to clarify the regulatory treatment of digital assets. On September 15, the Senate Agriculture Committee held a hearing on S. 4760, the Digital Commodity Consumer Protection Act, where committee members expressed bipartisan support for the bill. Furthermore, the House Financial Services Committee negotiated a bill to establish a regulatory regime for stablecoins. As currently drafted, that legislation would allow stablecoins to be issued by subsidiaries of insured depository institutions or nonbank entities approved by the Federal Reserve.
The Treasury reports provided an opportunity for the Biden administration to outline its positions on these bills and potentially facilitate the bipartisan support needed to pass digital asset legislation. The Biden administration’s support for digital asset legislation is critical, as Senate Banking Committee Chairman Sherrod Brown recently said he believes there is more skepticism about digital assets in the Senate Banking Committee than in the Senate. Agricultural Committee.
However, the Financial Stability Oversight Board is still working on its report on the financial stability risks posed by digital assets and the gaps in the regulation of digital assets. That report is expected next month and could provide more insight into the Biden administration’s legislative priorities regarding improving the regulation of digital assets.
