“Advances in digital and distributed ledger technology for financial services have…profound implications for the protection of consumers, investors, and businesses, including data privacy and security; financial stability and systemic risk; crime; national security; the ability to exercise human rights; financial inclusion and equity; energy demand and climate change,” read the executive order (EO) signed by the US President Joe Biden on March 9.
With this order, the US has now made its intentions clear in how it seeks to deal with cryptocurrencies and their attendant pros and cons; the order revealed that the US is going to choose a path of regulation rather than a ban. Senior White House officials informed the press that the order is not a reaction to the developments witnessed during Russia’s invasion of Ukraine and had been in the works for many months before being signed on March 9.
The global crypto community can collectively breathe a sigh of relief as the US’s positive outlook will go a long way in reinforcing the role of crypto as a crucial element of the global financial system. The market capitalisation of non-state digital assets touched $3 trillion in November 2021 from $14 billion in early November 2016, as per the order.
Don’t want to make this post too long, so will continue tomorrow, but in short this Executive Order is a positive move for the American crypto community, that includes all investors, developers and project promoters. This is definitely a step in the right direction
— Finallrounder (@finallrounder) March 10, 2022
Why it matters: It is one of the most significant policy directives to have come out of the US concerning the regulation of cryptocurrencies and other digital assets. The country’s lucid position will compel a lot of countries to rethink their strategy on digital assets given the import of the world’s largest economy’s embrace of digital assets and associated technologies.
What is the US’ plan for rolling out CBDCs?
There is a lot of buzz around Central Bank Digital Currency (CBDC) as is evident from the number of countries exploring them currently. As many as nine countries have launched their CBDCs but the US has been conspicuously sluggish to commence research. The announcement under the EO marks a proactive shift for the country in its CBDC journey.
When asked about the delay in pursuing CBDC, a senior administration official told the press that a CBDC project involves critical design decisions. “We’ve got to be very — very deliberate about that analysis because the implications of our moving in this direction are profound for the country that issues the world’s primary reserve currency,” he explained.
“Any future dollar payment system should be designed in a way that is consistent with United States priorities and democratic values, including privacy protections, and that ensures the global financial system has appropriate transparency, connectivity, and platform and architecture interoperability or transferability,” read the EO.
Potential for low-cost transactions: The EO put forth that a United States CBDC may be able to support efficient and low-cost transactions, especially for cross‑border funds transfers and payments, and augment greater access to the financial system. It will also pose fewer risks than private sector-administered digital assets. The order also acknowledged that there were potential risks and downsides.
Draft report on the future of money and payment systems: Biden has asked the Treasury Secretary to prepare a report on the future of money and payment systems and submit it within six months from March 9. The document will examine conditions that drive the adoption of digital assets; the influence of technological innovation on adoption, and the implications for the US financial system. The report must contain an analysis for the following:
- Potential implications of a US CBDC, based on the possible design choices, on economic growth and financial inclusion,
- Relationship between a CBDC and private sector-administered digital assets,
- Future of sovereign and privately produced money globally,
- The extent to which foreign CBDCs could displace existing currencies and payment systems thereby undermining US financial centrality,
- National security and financial crime while looking at illicit financing risks, sanctions risks, and implications for human rights,
- Effects of the growth of foreign CBDCs on US interests.
Impact on monetary policy: The Federal Reserve has been asked to look into whether US CBDC enhances or impedes the ability of monetary policy to function effectively as a critical macroeconomic stabilisation tool. It has been asked to work on a strategic plan for action to be taken by the US government to launch a US CBDC.
Outline legislative changes for CBDC: The EO directs the US Attorney General, in consultation with the Secretary of the Treasury and the Chairman of the Federal Reserve, to provide an assessment to the US President on whether legislative changes are necessary to issue a United States CBDC within 180 days starting March 9. The President has also asked for a corresponding legislative proposal within 210 days.
What are the proposed measures to protect consumers, investors, & businesses?
The US government believes that the risk of crimes such as fraud and theft, regulatory violations, privacy and data breaches, unfair and abusive acts, emanating due to a rise in the use of digital assets, may affect people who are not familiar with the market dynamics. It called for the following reports:
- Implications of digital assets: The US President has demanded a report within six months to be drafted by the Treasury Secretary in consultation with the Labour Secretary and other agencies like the Federal Trade Commission (FTC), the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), federal banking agencies, and the Consumer Financial Protection Bureau (CFPB). It will look to:
- Cover the implications of developments and adoption of digital assets and changes in financial market and payment system infrastructures for US consumers, investors, businesses.
- Address the conditions that would drive mass adoption of different types of digital assets and the risks and opportunities presented by such growth.
- Focus on the impact of technological innovation and people most vulnerable to disparate impact.
- Offer policy recommendations such as regulatory and legislative actions.
- Technical evaluation of digital-asset infrastructure: The EO also calls for the Director of the Office of Science and Technology Policy and the Chief Technology Officer of the US to undertake a technical evaluation of the infrastructure, capacity, and expertise necessary to support the introduction of a CBDC system within six months.
The evaluation should address:
- Technical risks of the various designs of CBDC with an eye on emerging technologies such as quantum computing.
- Recommendations on how the inclusion of digital assets in government processes may affect the work of the US Government and the provision of government services,
- Risks and benefits to cybersecurity, customer experience, and social‑safety‑net programs.
- Role of law enforcement agencies: The US President has asked the Attorney General, in consultation with Secretaries of Treasury and Homeland Security, to prepare a report on the role of law enforcement agencies in detecting, investigating, and prosecuting criminal activity related to digital assets within six months.
- Impact of distributed ledger technologies on climate change: A report will have to be submitted to the US President on whether distributed ledger technology (the underlying technology behind crypto) will affect short, medium, and long-term economic and energy transitions. The report will look to address the following:
- The potential to impede or advance efforts to tackle climate change.
- The effect of cryptocurrencies’ consensus mechanisms (proof-of-work) on energy usage as well as alternative mechanisms to the consensus model.
- Potential uses of blockchain that could support monitoring of climate impacts, such as exchanging of liabilities for greenhouse gas emissions, water, and other natural or environmental assets;
- Implications for energy policy, energy efficiency incentives, and sources of energy supply.
- Financial Stability, Systemic Risk, and Market Integrity: The EO has directed the Financial Stability Oversight Council (FSOC) to produce a report outlining financial stability risks and regulatory gaps posed by digital assets within 210 days of the date of the EO. It should also contain recommendations to address risks.
- The draft should consider features of different digital assets.
- It can include proposals for additional regulation and supervision as well as new legislation.
- The FSOC was conceived in response to assess financial stability risks and regulatory gaps posed by the adoption of digital assets in 201
Moreover, the EO also nudges the Attorney General, FTC, and CFPB to study the effects of the growth of digital assets on competition policy. FTC and the CFPB are additionally tasked with finding out which privacy or consumer protection measures can be used to protect users of digital assets. Lastly, agencies like SEC, CFTC, Federal Reserve, among others, have to look at the extent to which investor and market protection measures can address the risks of digital assets.
How does the EO intend to limit illicit finance and national security risks?
The order signed by President Biden reckons with the ability of digital assets to facilitate cybercrime‑related financial networks such as ransomware gangs. It underscores the need for scrutiny of digital assets and ways to mitigate these risks through regulation, supervision, public‑private engagement, oversight, and law enforcement. It mandates the following:
- Update National strategy for combating terrorism and other illicit financings: The US president has asked various departments such as the treasury, commerce, and homeland security, among several others, to submit “supplemental annexes” to the National strategy within 90 days of its submission to the US Congress. The supplemental reports should detail illicit finance risks posed by digital assets, and how digital assets are used by illicit actors.
- Develop a coordinated action plan: Several agencies and departments such as the Secretary of State, the Office of Management and Budget, and National Intelligence, among others, will develop a coordinated action plan based on the conclusions derived in the updated version of the National Strategy. The plan should clarify the role of law enforcement and provide measures to increase compliance with Anti-Money Laundering/ Counter Financing of Terrorism (AML/CFT) obligations within four months of the Strategy’s submission to the US Congress.
How will the US foster international cooperation?
PM Narendra Modi had said recently that the world needs to join hands to tackle challenges from digital assets. The US President seems to concur with Modi as he laid down the following policy in the EO:
- International cooperation among public authorities: Biden said that cooperation helps in maintaining high regulatory standards and a level playing field. “Uneven regulation, supervision, and compliance across jurisdictions creates opportunities for arbitrage,” read the order. He said that it is only through cooperation that inadequate enforcement of AML/CFT enforcement can be reversed. Biden added that efforts must be made to reduce inefficiencies in international funds transfer and payment systems.
- The US will continue to work with countries on standards for the development and interoperability of digital payment architectures and CBDCs to reduce payment inefficiencies.
- The G7 report outlining a set of policy principles for CBDCs is an “important contribution to establishing guidelines for jurisdictions” for the exploration and potential development of CBDCs.
- The US supports the G20 roadmap for “addressing challenges and frictions with cross-border funds transfers and payments, and the international dimensions of CBDC designs”.
- The international Financial Stability Board (FSB), together with standard-setting bodies, is working on issues related to stablecoins, and other international dimensions of digital assets and payments.
Establish a framework for interagency international engagement: The EO stipulates that the treasury secretary must prepare a framework to be put in place for foreign counterparts to adapt, update, and enhance adoption of principles and standards for how digital assets must be used and transacted, and to develop digital asset and CBDC technologies consistent with legal requirements.
- It must make provision for prioritised lines of effort and coordinated messaging among countries.
- It should make room for activities with foreign partners, such as foreign assistance, capacity-building efforts, and global compliance.
- Consequently, a report will have to be sent to the US President within a year of the date of the establishment of the framework. It will be drafted by the treasury secretary with help of several parties. The report will detail priority actions taken under the framework and its effectiveness.
- The EO also provides for the establishment of a framework to enhance US’s economic competitiveness in digital asset technologies. This report will be prepared by the Commerce Secretary within 180 days of the date of the EO.
- A report will have to be sent to the US President prepared by the Attorney General identifying how international law enforcement cooperation can be strengthened for detecting, investigating, and prosecuting criminal activity related to digital assets. It has to be sent within 90 days of the date of the EO.
Why is the US coming out with policy directions on digital assets?
The order explained that the development in digital assets and their increased adoption requires the US to evolve and align with the changing times. It must be pointed out that couched in the diplospeak of the EO is the US intention to protect its financial hegemony as is evident from the comments made by a senior administration official during a press briefing.
“Innovation is not only critical for our economic security but also for our national security, enabling us to maintain our technological and economic edge to compete and win in the 21st century,” said the official. “Will help ensure we preserve the critical role of the United States in the global financial system. This is critical for ensuring the strength of US national security tools that we need to combat illicit actors, like rogue states and cybercriminals,” he added.
The country said that its intervention is also needed to mitigate the risks arising out of digital assets to consumers and investors. A clear policy direction will offer the following macroeconomic benefits
- Business protections;
- Financial stability;
- Combating and Preventing crime and illicit finance (money laundering);
- Financial system integrity;
- National security;
- Ability to exercise human rights;
- Financial inclusion and equity;
- Climate change and pollution.
“There hadn’t previously been an organised effort to bring together the expertise and authorities of the entire US government to inform a holistic approach to digital assets,” an official explained during the briefing.
What are the objectives laid down by the EO?
The US government has delineated the following objectives:
- Addressing national security risks posed by misuse of digital assets: The spectre of illicit finance continues to plague digital assets as the cloud of threats like money laundering, cybercrime, ransomware, narcotics and human trafficking, and terrorism financing hovers over them.
- Digital assets can be used as a tool to circumvent financial sanctions by the US and foreign regimes. This becomes particularly noteworthy in the context of the Russia-Ukraine crisis where many believe that Russia is resorting to crypto to evade sanctions. “The use of cryptocurrency is not a viable workaround to the set of financial sanctions imposed across the entire Russian economy and its central bank,” a senior official said during the briefing.
- A lack of implementation of anti‑money laundering and countering the financing of terrorism (AML/CFT) standards in jurisdictions abroad threaten the US and global financial systems with illicit financing, as per the order.
- The perpetrators of ransomware incidents and other cybercrimes launder their illicit proceeds using digital asset service providers in jurisdictions that have lax AML/ CFT standards mandated by the Financial Action Task Force (FATF).
- The US government has outlined that there is a need for appropriate controls and accountability for digital assets systems to comply with requirements such as transparency, privacy, and security to counter illicit activities.
- Promoting access to affordable financial services: A clearly-defined policy will offer equitable access to financial services to people who are underbanked. The order also underlined the high costs of cross-border money transfers which needs to be brought down so as to serve people underserved by the traditional system and improve access to the overall financial system.
- Protecting US consumers, investors, and businesses: The order said that a lack of oversight will result in inadequate protection for sensitive financial data, custodial arrangements relating to customer assets, and disclosure risks of investment. It pointed out that billions of dollars had been lost on account of cybersecurity and market failures at digital asset exchanges. The US should implement safeguards to promote the responsible development of digital assets for reasons such as privacy and preventing unlawful surveillance.
Mitigating systemic risk: It wrote that the digital asset trading platforms must be made to comply with appropriate regulations or supervision lest they pose a risk to financial stability along the lines of standards that govern traditional market apparatus. The use cases of digital assets create additional economic and financial risks which mean that the regulators have to evolve as well to address these risks.
- Supporting technological advances in digital assets: The US, with this executive order, also hopes to develop, design, and implement technologies that support digital assets, which have substantial implications, in a responsible manner. Some of the features include privacy & security, defend against illicit exploitation, and reduce environmental pollution.
Which are the agencies tasked with achieving the policy goals?
The coordination among agencies will be managed by the Assistant to the President for National Security Affairs (APNSA) and the Assistant to the President for Economic Policy (APEP).
The agencies included are as follows:
- Secretary of State,
- Attorney General,
- Secretary of the Treasury,
- Administrator of the Environmental Protection Agency,
- Secretary of Defense,
- Director of the Office of Management and Budget,
- Secretary of Commerce,
- Director of National Intelligence, the Director of the Domestic Policy Council,
- Secretary of Labor,
- Chair of the Council of Economic Advisers,
- Secretary of Energy,
- Director of the Office of Science and Technology Policy,
- Secretary of Homeland Security,
- Administrator of the Office of Information and Regulatory Affairs,
- Director of the National Science Foundation,
- Administrator of the United States Agency for International Development.
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