On March 9, 2022, President Biden signed the Executive Order on Ensuring Responsible Development of Digital Assets (“Executive Order”), outlining the U.S. Government’s national policy objectives and “whole-of-government” strategy for understanding the benefits and addressing the risks of digital assets.
- The Executive Order acknowledges the growth of “digital assets and related innovations” and the existence of “inconsistent controls to defend against certain key risks,” calling for a change in the U.S. Government’s approach to digital assets, including plans to explore the development of a U.S. Central Bank Digital Currency (“CBDC”).1
- While the Executive Order does not prompt any immediate change to the domestic digital asset regulatory framework, the directive sets forth an interagency policy coordination process to research and analyze digital assets and CBDC technology.
- The Executive Order further articulates the U.S. Government’s policy objectives that will guide how government agencies evaluate the risks and benefits of a U.S. CBDC and the continued adoption of digital assets in the United States:
- Consumer and investor protection: The Executive Order seeks to ensure that appropriate safeguards are in place for protecting sensitive financial data of consumers, investors, and businesses.
- U.S. and global financial stability and systemic risks: The Executive Order highlights that not all digital asset trading platforms and service providers are subject to, or compliant with, adequate regulations or supervision, which requires an “evolution to a regulatory approach” that effectively addresses risks to U.S. and global financial stability.2
- Mitigation of illicit finance and national security risks: The Executive Order calls for appropriate regulation, oversight, and law enforcement action to protect national security interests, explaining that digital assets may be misused by illicit actors seeking to conduct money laundering, cybercrime, terrorism, and proliferation, and to circumvent sanctions.
- U.S. leadership and economic competitiveness: The Executive Order underscores the importance of U.S. financial leadership, in that the United States is to “remain at the forefront of responsible development and design of digital assets,” in order to effectively protect and promote U.S. economic interests and the United States’ role in the international financial system.3
- Financial inclusion with safe and affordable financial services: The Executive Order states that the United States has a “strong interest” in promoting responsible innovation that expands equitable access to financial services for Americans that are “underserved by the traditional banking system.”4
- Technological advances that promote responsible development: The Executive Order’s final policy objective indicates that the U.S. government seeks to “promote responsible development and use of digital assets,” by ensuring that digital asset-related infrastructure protects privacy and security, effectively defends against illicit use, and reduces environmental impacts.5
The Executive Order comes amid growing regulatory focus on the digital assets industry and builds upon work of U.S. authorities to research digital assets. Unlike prior efforts, however, the Executive Order outlines specific actions—identifying government agencies and assigning tasks and timelines—that sets in motion a national regulatory framework for digital asset design and development, including the potential adoption of a U.S. CBDC.
- In the absence of an overarching regulatory framework on digital assets, U.S. regulators and supervisors have issued advisories on the risks posed by digital assets and provided guidance on applying existing regulatory standards to emerging technologies. The Financial Crimes Enforcement Network (“FinCEN”) issued guidance as early as 2013 regarding the application of FinCEN’s regulations to users, exchangers, and administrators of virtual currency,6 with several more advisories and guidance documents released in the subsequent years.7
- Regulatory guidance and advisories have been further reinforced by an increasing number of enforcement actions against individuals and entities for violations of the Bank Secrecy Act (“BSA”) and failures to comply with U.S. registration requirements for digital asset service providers. Notably, the U.S. Securities and Exchange Commission (“SEC”) has recently brought enforcement actions against a number of individuals and entities operating without the required registrations to operate in the digital assets industry. Both the SEC and the Commodity Futures Trading Commission (“CFTC”) have also separately published frameworks and guidance to assist industry participants in understanding the application of federal securities and commodities laws to different types of digital assets.8
- In addition to increased regulatory attention, the President’s Working Group on Financial Markets (“PWG”) issued a report on stablecoins in November 2021. The PWG—together with the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Comptroller of the Currency (“OCC”)—identified regulatory gaps governing the use of stablecoins and called on Congress to enact legislation that establishes a framework for supervising and regulating stablecoins. The PWG report stresses the importance for the U.S. Government to address risks posed by stablecoins—similar to the concerns highlighted in the Executive Order—and provides a primer on why a regulatory framework for digital assets is needed.
- Most recently, the Federal Reserve released a report in January 2022, assessing the implications of, and options for, issuing a U.S. CBDC. The Federal Reserve’s evaluation largely aligns with the policy objectives in the Executive Order, including by identifying financial inclusion as a benefit while acknowledging challenges to financial stability, privacy and data protection, and financial crimes if a U.S. CBDC were adopted. Overall, the U.S. Government’s national strategy on digital assets can be seen as a continuation of the Federal Reserve’s report and findings—particularly, as the Executive Order encourages the Federal Reserve to continue its research and development on the steps and requirements for implementing a U.S. CBDC.
The Executive Order also highlights specific areas of concern regarding illicit finance and national security risks posed by the abuse of digital assets. Despite these risks, however, the Executive Order maintains that the United States should remain at the forefront of digital asset leadership, viewing such leadership as critical for maintaining U.S. economic competitiveness and preserving the dominant role of the U.S. dollar in the international financial system.
- The Executive Order states that the U.S. government “must mitigate the illicit finance and national security risks posed by misuse of digital assets” and explains that illicit actors often exploit digital asset service providers in jurisdictions with weaker or nonexistent anti-money laundering/ combating the financing of terrorism (“AML/CFT”) regulatory regimes.9
- The Executive Order also notes that digital assets may be used by illicit actors, including state actors, seeking to circumvent U.S. and foreign financial sanctions. Specifically, the growth in decentralized payment platforms, peer-to-peer payment activity, and anonymous blockchain ledgers without sufficient controls pose both illicit finance risks and national security risks.10
- The growth of digital assets—and specifically, CBDCs—also pose systemic risks to U.S. economic competitiveness and the dominance of the U.S. dollar. As China and Russia move forward with plans for a digital yuan and digital ruble, the United States’ decision on whether or not to issue a U.S. CBDC may have direct implications for the global use of the U.S. dollar and the United States’ leadership role in the financial system going forward. The Executive Order therefore signals the importance of U.S. CBDC research and development by placing the “highest urgency” on such efforts.11
- Although the ultimate impact of the Executive Order remains to be seen—with specific reports and policy recommendations to be presented over the coming year—financial institutions play a key role in identifying suspicious purchases, transfers, and transactions involving digital assets. Financial institutions should ensure that their employees are aware of red flags associated with digital assets and that their internal monitoring systems are appropriately tuned to alert for illicit conduct involving digital assets, including, but not limited to, the following typologies:12
- Presence of darknet marketplaces;
- Unregistered or illicit operating peer-to-peer exchangers;
- Unregistered foreign-located money services businesses (“MSBs”);
- Unregistered or illicitly operating convertible virtual currency (“CVC”) kiosks; and
- Illicit activity leveraging CVC kiosks.
Such vigilance is particularly critical in the face of efforts to use digital assets to evade the sweeping sanctions imposed by the U.S. and its allies in connection with Russia’s ongoing invasion of Ukraine.13
- Financial institutions should evaluate their exposure to digital asset service providers and digital assets. Based on the financial institution’s exposure—such as if the financial institution provides direct services to digital asset service providers or the financial institution’s customers provide services to digital asset service providers—financial institutions should review their policies, procedures, and processes and ensure that their internal controls are appropriately risk-based to manage the risks associated with their customers and customer’s customers.
- Relatedly, financial institutions should routinely test their internal controls to ensure the effectiveness of their current processes for detecting and reporting illicit activity associated with digital assets.
- Financial institutions should ensure that their risk assessments are reviewed and updated whenever there is a major change in the risk environment or their business model, such as an expansion of their product and service offerings to include digital assets. As part of their risk assessments, financial institutions should take into account their exposure to jurisdictions with weaker or nonexistent AML/CFT regulatory regimes.
1The White House, “Executive Order on Ensuring Responsible Development of Digital Assets,” 2022, available at: https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets/
2The White House, “Executive Order on Ensuring Responsible Development of Digital Assets,” 2022, available at: https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets/
3The White House, “Executive Order on Ensuring Responsible Development of Digital Assets,” 2022, available at: https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets/
4The White House, “Executive Order on Ensuring Responsible Development of Digital Assets,” 2022, available at: https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets/
5The White House, “Executive Order on Ensuring Responsible Development of Digital Assets,” 2022, available at: https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets/
6FinCEN, “Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies,” FIN-2013-G001, March 18, 2013, available at: https://www.fincen.gov/sites/default/files/shared/FIN-2013-G001.pdf
7FinCEN, “Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies,” FIN-2019-G001, May 9, 2019, available at: https://www.fincen.gov/sites/default/files/2019-05/FinCEN%20Guidance%20CVC%20FINAL%20508.pdf
8SEC, “Framework for ‘Investment Contract’ Analysis of Digital Assets,”https://www.sec.gov/files/dlt-framework.pdf; CFTC, “Digital Assets Primer,” https://www.cftc.gov/media/5476/DigitalAssetsPrimer/download.
9The White House, “Executive Order on Ensuring Responsible Development of Digital Assets,” 2022, available at: https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets/
10The White House, “Executive Order on Ensuring Responsible Development of Digital Assets,” 2022, available at: https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets/
11The White House, “Fact Sheet: President Biden to Sign Executive Order on Ensuring Responsible Development of Digital Assets,” 2022, available at: https://www.whitehouse.gov/briefing-room/statements-releases/2022/03/09/fact-sheet-president-biden-to-sign-executive-order-on-ensuring-responsible-innovation-in-digital-assets/
12FinCEN, “Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies,” FIN-2019-G001, May 9, 2019, available at: https://www.fincen.gov/sites/default/files/advisory/2019-05-10/FinCEN%20Advisory%20CVC%20FINAL%20508.pdf
13 FinCEN, “FinCEN Advises Increased Vigilance for Potential Russian Sanctions Evasion Attempts,” FIN-2022-Alert001, March 7, 2022, https://www.fincen.gov/sites/default/files/2022-03/FinCEN%20Alert%20Russian%20Sanctions%20Evasion%20FINAL%20508.pdf.
See also K2 Integrity, “Global Markets May Face Risk of Virtual Currency Abuse as Russian Actors Seek to Circumvent Sanctions,” March 9, 2022, https://www.k2integrity.com/en/knowledge/policy-alerts/global-markets-may-face-risk-of-virtual-currency-abuse-as-russian-actors-seek.