Noting the explosive use of digital assets across international financial sectors/markets, President Biden signed an Executive Order (EO) on Ensuring Responsible Development of Digital Assets, calling for a whole-of-government approach to address the opportunities and inherent risks associated with digital assets, while harnessing their potential benefits and underlying technology. Digital assets have surpassed a $2 trillion market cap with over 40 million Americans having invested in, traded, or used cryptocurrencies. President Biden's EO identifies six key priorities, chief amongst them having the United States take a leading role in international engagement regarding governance of digital assets. The President's stated goal is to maintain U.S. technological leadership and support innovation, while mitigating risks for consumers, businesses, the broader financial system, and the environment. 

This summary underscores the key priorities and initiatives of the executive order, as well as the industry expectations for what lies ahead. Digital asset market participants should take note of the affirmative steps outlined in the EO, as they are likely precursors to broader regulations that may soon follow.
 

1. Protect U.S. Consumers, Investors, and Businesses


Citing digital asset volatility as an example of potential consumer/investor risk, the EO calls on numerous federal departments and agencies, including the Department of Treasury, to conduct assessments and develop policy recommendations to create a more equitable, inclusive, secure, and efficient digital asset sector. On the regulatory front, the executive order encourages relevant agencies to develop safeguards that protect consumer/investor interests.
 

2. Protect U.S. Global Financial Stability and Mitigate Systemic Risk


The EO calls on the Financial Stability Oversight Council to assess and mitigate financial risks associated throughout the U.S. economy and beyond. When coupled with the ongoing Russia-Ukraine conflict, this all but guarantees that the Biden administration will engage in heightened scrutinization of certain digital assets and how they are undercutting U.S. sanctions and other prohibitions. 
 

3. Mitigate the Illicit Finance and National Security Risks Posed by the Illicit Use of Digital Assets


A large point of emphasis noted throughout the executive order pertained to national security risks related to digital assets. The order calls for coordinated action amongst a plethora of government agencies to mitigate risks at a domestic level, while also directing the state department to work with U.S. allies and partners to create and maintain frameworks, capabilities, and partnerships designed to respond to such risks. Cybercriminals have increasingly exploited the decentralized and unidentifiable nature of digital assets to carry out financial crimes. The steps noted in the order signify an affirmative approach toward cracking down on the exploitable characteristics of digital assets and are likely to be followed by a broader legislative and regulatory push.

Coinciding with the release of this EO, the Treasury Department's FinCEN also this week issued a detailed advisory regarding compliance risks for cryptocurrency exchanges and financial institutions, reminding companies of the range of risks that are particularly on point in light of the Russian invasion of Ukraine and flight of assets from different markets. We recommend that clients involved in cryptocurrency review their compliance measures accordingly.
 

4. Promote U.S. Leadership in Technology and Economic Competitiveness to Reinforce U.S. Leadership in the Global Financial System


The Department of Commerce is directed to work across various sectors of the U.S. government to establish frameworks that drive U.S. competitiveness and leadership through leveraging digital asset technology. This is a welcomed initiative by the crypto industry, who have long called for U.S. leadership in the digital asset environment, especially with the Chinese having effectively banned the use of cryptocurrency. 

President Biden's directive also orders the U.S. government to study and support technological advances in designing and implementing digital asset systems, while focusing on prioritizing privacy and security, combating illicit exploitation, and reducing environmental impacts. 
 

5. Promote Equitable Access to Safe and Affordable Financial Services


Acknowledging the inequities prevalent in access to safe and affordable financial services, the order emphasizes digital asset innovation considering such inequities and disparate impact risks. The EO calls for the Secretary of the Treasury, and other relevant agencies, to produce a "Future of Money and Payment Systems" report that specifically includes suggestions regarding economic growth, financial growth and inclusion, national security, and the extent to which technological innovation may influence the future. The report will also address how the current financial system may not meet consumer needs. 
 

6. Explore a U.S. Central Bank Digital Currency (CBDC)


The use of CBDCs on an international level is a rising trend with almost 100 countries already in the research and development process. The goal for CBDCs is to establish standards for design and cross-border systems. At the moment, China is leading in the research and development of CBDCs, with an increasing number of consumers using technology for transactions and finances. To stay competitive, the EO urgently calls for the consideration of a potential U.S. CBDC as a tool for both macroeconomic stabilization and to promote U.S. priorities and democratic values abroad. In the meantime, the order encourages the Federal Reserve to continue research related to a U.S. CBDC and its implications on U.S monetary policy.
 

General Compliance Advice Going Forward


We recommend organizations review their current customer and vendor relationships, as well as any prospective transactions, that could involve or be impacted by digital assets. Furthermore, we encourage entities that currently use digital wallets to closely monitor the evolving regulatory environment for changes throughout 2022. Companies should take the following key actions:
 

  • Conduct a regulatory review to ensure that you are complying with all laws and regulations.
  • Update legal memos: If you have received a Howie memorandum in the past, it is time to reevaluate your token offering or product offering.
  • Review or create an Anti-money Laundering/Know Your Customer/OFAC compliance program.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.