The digital assets market has grown significantly in recent years. Millions of people globally, including 16% of adult Americans, have purchased digital assets—which reached a market capitalization of $3 trillion globally last November. Digital assets present potential opportunities to reinforce U.S. leadership in the global financial system and remain at the technological frontier. But they also pose real risks as evidenced by recent events in crypto markets. The May crash of a so-called stablecoin and the subsequent wave of insolvencies wiped out over $600 billion of investor and consumer funds.
President Biden’s March 9 Executive Order (EO) on Ensuring Responsible Development of Digital Assets outlined the first whole-of-government approach to addressing the risks and harnessing the potential benefits of digital assets and their underlying technology. Over the past six months, agencies across the government have worked together to develop frameworks and policy recommendations that advance the six key priorities identified in the EO: consumer and investor protection; promoting financial stability; countering illicit finance; U.S. leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation.
The nine reports submitted to the President to date, consistent with the EO’s deadlines, reflect the input and expertise of diverse stakeholders across government, industry, academia, and civil society. Together, they articulate a clear framework for responsible digital asset development and pave the way for further action at home and abroad. The reports call on agencies to promote innovation by kickstarting private-sector research and development and helping cutting-edge U.S. firms find footholds in global markets. At the same time, they call for measures to mitigate the downside risks, like increased enforcement of existing laws and the creation of commonsense efficiency standards for cryptocurrency mining. Recognizing the potential benefits and risks of a U.S. Central Bank Digital Currency (CBDC), the reports encourage the Federal Reserve to continue its ongoing CBDC research, experimentation, and evaluation and call for the creation of a Treasury-led interagency working group to support the Federal Reserve’s efforts.
Protecting Consumers, Investors, and Businesses
Digital assets pose meaningful risks for consumers, investors, and businesses. Prices of these assets can be highly volatile: the current global market capitalization of cryptocurrencies is approximately one-third of its November 2021 peak. Still sellers commonly mislead consumers about digital assets’ features and expected returns, and non-compliance with applicable laws and regulations remains widespread. One study found that almost a quarter of digital coin offerings had disclosure or transparency problems—like plagiarized documents or false promises of guaranteed returns. Outright fraud, scams, and theft in digital asset markets are on the rise: according to FBI statistics, reported monetary losses from digital asset scams were nearly 600 percent higher in 2021 than the year before.
Since taking office, the Biden-Harris Administration and independent regulators have worked to protect consumers and ensure fair play in digital assets markets by issuing guidance, increasing enforcement resources, and aggressively pursuing fraudulent actors. As outlined in the reports released today, the Administration plans to take the following additional steps:
- The reports encourage regulators like the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), consistent with their mandates, to aggressively pursue investigations and enforcement actions against unlawful practices in the digital assets space.
- The reports encourage Consumer Financial Protection Bureau (CFPB) and Federal Trade Commission (FTC), as appropriate, to redouble their efforts to monitor consumer complaints and to enforce against unfair, deceptive, or abusive practices.
- The reports encourage agencies to issue guidance and rules to address current and emergent risks in the digital asset ecosystem. Regulatory and law enforcement agencies are also urged to collaborate to address acute digital assets risks facing consumers, investors, and businesses. In addition, agencies are encouraged to share data on consumer complaints regarding digital assets—ensuring each agency’s activities are maximally effective.
- The Financial Literacy Education Commission (FLEC) will lead public-awareness efforts to help consumers understand the risks involved with digital assets, identify common fraudulent practices, and learn how to report misconduct.
Promoting Access to Safe, Affordable Financial Services
Today, traditional finance leaves too many behind. Roughly 7 million Americans have no bank account. Another 24 million rely on costly nonbank services, like check cashing and money orders, for everyday needs. And for those who do use banks, paying with traditional financial infrastructure can be costly and slow—particularly for cross-border payments.
The digital economy should work for all Americans. That means developing financial services that are secure, reliable, affordable, and accessible to all. To make payments more efficient, the Federal Reserve has planned the 2023 launch of FedNow—an instantaneous, 24/7 interbank clearing system that will further advance nationwide infrastructure for instant payments alongside The Clearinghouse’s Real Time Payments system. Some digital assets could help facilitate faster payments and make financial services more accessible, but more work is needed to ensure they truly benefit underserved consumers and do not lead to predatory financial practices.
To promote safe and affordable financial services for all, the Administration plans to take the following steps:
- Agencies will encourage the adoption of instant payment systems, like FedNow, by supporting the development and use of innovative technologies by payment providers to increase access to instant payments, and using instant payment systems for their own transactions where appropriate – for example, in the context of distribution of disaster, emergency or other government-to-consumer payments.
- The President will also consider agency recommendations to create a federal framework to regulate nonbank payment providers.
- Agencies will prioritize efforts to improve the efficiency of cross-border payments by working to align global payments practices, regulations, and supervision protocols, while exploring new multilateral platforms that integrate instant payment systems.
- The National Science Foundation (NSF) will back research in technical and socio-technical disciplines and behavioral economics to ensure that digital asset ecosystems are designed to be usable, inclusive, equitable, and accessible by all.
Fostering Financial Stability
Digital assets and the mainstream financial system are becoming increasingly intertwined, creating channels for turmoil to have spillover effects. Stablecoins, in particular, could create disruptive runs if not paired with appropriate regulation. The potential for instability was illustrated in May 2022 by the crash of the so-called stablecoin TerraUSD and the subsequent wave of insolvencies that erased nearly $600 billion in wealth. In October, the Financial Stability Oversight Council (FSOC) will publish a report discussing digital assets’ financial-stability risks, identifying related regulatory gaps, and making additional recommendations to foster financial stability.
The Biden-Harris Administration has long recognized the need for regulation to address digital assets’ stability risks. For example, in 2021, the President’s Working Group on Financial Markets recommended steps for Congress and regulators to make stablecoins safer. Building on this work, the Administration plans to take the additional following steps:
- The Treasury will work with financial institutions to bolster their capacity to identify and mitigate cyber vulnerabilities by sharing information and promoting a wide range of data sets and analytical tools.
- The Treasury will work with other agencies to identify, track, and analyze emerging strategic risks that relate to digital asset markets. It will also collaborate on identifying such risks with U.S. allies, including through international organizations like the Organization for Economic Co-operation and Development (OECD) and the Financial Stability Board (FSB).
Advancing Responsible Innovation
U.S. companies lead the world in innovation. Digital asset firms are no exception. As of 2022, the United States is home to roughly half of the world’s 100 most valuable financial technology companies, many of which trade in digital asset services.
The U.S. government has long played a critical role in priming responsible private-sector innovation. It sponsors cutting-edge research, helps firms compete globally, assists them with compliance, and works with them to mitigate harmful side-effects of technological advancement.
In keeping with this tradition, the Administration plans to take the following steps to foster responsible digital asset innovation:
- The Office of Science and Technology Policy (OSTP) and NSF will develop a Digital Assets Research and Development Agenda to kickstart fundamental research on topics such as next-generation cryptography, transaction programmability, cybersecurity and privacy protections, and ways to mitigate the environmental impacts of digital assets. It will also continue to support research that translates technological breakthroughs into market-ready products. Additionally, NSF will back social-sciences and education research that develops methods of informing, educating, and training diverse groups of stakeholders on safe and responsible digital asset use.
- The Treasury and financial regulators are encouraged to, as appropriate, provide innovative U.S. firms developing new financial technologies with regulatory guidance, best-practices sharing, and technical assistance through things like tech sprints and Innovation Hours.
- The Department of Energy, the Environmental Protection Agency, and other agencies will consider further tracking digital assets’ environmental impacts; developing performance standards as appropriate; and providing local authorities with the tools, resources, and expertise to mitigate environmental harms. Powering crypto-assets can take a large amount of electricity—which can emit greenhouse gases, strain electricity grids, and harm some local communities with noise and water pollution. Opportunities exist to align the development of digital assets with transitioning to a net-zero emissions economy and improving environmental justice.
- The Department of Commerce will examine establishing a standing forum to convene federal agencies, industry, academics, and civil society to exchange knowledge and ideas that could inform federal regulation, standards, coordinating activities, technical assistance, and research support.
Source: The White House