On September 16, 2022, the Treasury Department issued three reports pursuant to President Joseph Biden's March 9 Executive Order 14067 on "Ensuring Responsible Development of Digital Assets." (For more information on the executive order, please see our prior Legal Update "Biden Executive Order Calls for Regulatory Proposals on Digital Assets and Central Bank Digital Currency.") The issuance of the reports was followed by Treasury Under Secretary for Domestic Finance Nellie Liang giving remarks at the Brookings Institution on September 22 explaining the reports and their recommendations.
The Treasury reports—titled The Future of Money and Payments; Crypto-Assets: Implications for Consumers, Investors, and Businesses; and Action Plan to Address Illicit Financing Risks of Digital Assets—provide an overview of the operation and current uses of digital assets, the role of payment systems in the financial system and the emergence of nonbank payment systems; a discussion of the potential risks and benefits of a U.S. central bank digital currency ("CBDC"); and an assessment of the potential use of digital assets in illicit finance. Most importantly, the reports also contain recommendations to improve U.S. policy on digital assets and 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 U.S. CBDC, in case one is determined to be in the national
interest.
- In support of this effort, the Treasury Department will lead an inter-agency working group to coordinate research and assessment of the adoption of a U.S. CBDC.
- Recommendation 2: The U.S. government should encourage use of instant payments systems to support a more competitive, efficient, and inclusive U.S. payment landscape.
- Recommendation 3: A federal regulatory framework should be
established for nonbank payment providers to protect users and the
financial system while supporting responsible innovations in
payments.
- Under Secretary Liang's remarks 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 enhancing 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, pursue vigilant monitoring of the crypto-asset sector for unlawful activity, aggressively pursue and expand investigations, coordinate cross-agency actions, and bring civil and criminal actions to enforce applicable laws with a particular focus on consumer, investor, and market protection.
- Recommendation 2: U.S. 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 should work collaboratively to promote consistent and comprehensive oversight.
- Recommendation 3: U.S. authorities should, where appropriate, work individually and through the Financial Literacy and Education Commission to ensure that U.S. consumers, investors, and businesses have access to trustworthy information on crypto-assets.
3) Action Plan to Address Illicit Financing Risks of Digital Assets:
- Priority Action 1: The United States shall continue to monitor the development of the digital assets sector for emerging risks.
- Priority Action 2: The U.S. government shall improve anti-money-laundering/countering-the-financing-of-terrorism ("AML/CFT") regulation and enforcement in foreign jurisdictions.
- Priority Action 3: U.S. regulatory agencies shall update Bank Secrecy Act regulations to combat threats associated with the development of emerging financial technologies.
- Priority Action 4: The Treasury Department shall continue to engage with intergovernmental standard-setting bodies to supervise, examine, and ensure virtual assets comply with existing AML/CFT regulatory obligations.
- Priority Action 5: The U.S. government shall impose sanctions, special measures, and other means of disrupting the illicit use of virtual assets.
- Priority Action 6: The U.S. government shall 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 U.S. government shall promote the modernization of U.S. payments infrastructure by working with government agencies and U.S. firms to promote the development and regulation of new financial technologies.
Each Priority Action also contained a detailed list of supporting actions.
Our Assessment
Although the Treasury reports provide a great deal of information on digital asset markets and the risks they may present, they noticeably do not call on Congress to pass legislation to enhance the U.S. regulatory framework for digital assets. Instead, the reports encourage U.S. regulators to use their existing enforcement and regulatory authorities to address identified risks and ensure compliance with existing law.
The absence of legislative recommendations was striking 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. Further, the House Financial Services Committee has been negotiating a bill to establish a regulatory regime for stablecoins. As currently drafted, that legislation would permit 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 set forth 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 Chair Sherrod Brown recently stated that he believes there is more skepticism about digital assets at the Senate Banking Committee than at the Senate Agricultural Committee.
However, the Financial Stability Oversight Council is still working on its report on the financial stability risks presented by digital assets and the gaps in the regulation of digital assets. That report is expected next month and may provide more insights into the Biden administration's legislative priorities with respect to enhancing the regulation of digital assets.
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