On March 9, 2022, President Biden signed an Executive Order on Ensuring Responsible Development of Digital Assets (“Executive Order”) to mobilize the federal government to develop a strategy for digital assets, intending to encourage innovation in a manner that mitigates the risks to consumers, investors, and businesses. The Executive Order mandates an interagency approach across several executive departments and federal agencies to conduct reports and analyses on key issues impacting digital assets, including consideration of U.S. Central Bank Digital Currencies (“CBDC”). The Executive Order identifies six primary policy objectives:
- protect U.S. consumers, investors, and businesses;
- protect U.S. and global financial stability and mitigate systemic risk;
- mitigate the illicit finance and national security risks posed by misuse of digital assets;
- reinforce U.S. leadership in the global financial system and in technological and economic competitiveness;
- promote access to safe and affordable financial services; and
- support technological advances that promote responsible development and use of digital assets.
The Executive Order calls upon the Assistant to the President for National Security Affairs and the Assistant to the President for Economic Policy to use the interagency process outlined in the February 4, 2021 National Security Memorandum 2/nSM-2 to allow the relevant executive departments and agencies to implement policy objectives. The Executive Order calls for a series of reports within 180 days and 210 days, assessing the benefits and risks of adopting digital assets into the U.S. financial system.
Position on U.S. Central Bank Digital Currencies
Significantly, the Executive Order sets forth the Biden Administration’s policy on a U.S. CBDC, which places “the highest urgency on research and development efforts into the design and deployment options of a United States CBDC.” The stated policy envisions the U.S. as being at the forefront of international discussions on CBDC and working toward a currency that would be “interoperable” with digital currencies that may be issued in other jurisdictions. Echoing many of the themes outlined in the Federal Reserve’s discussion paper on the U.S. Dollar in the Age of Digital Transformation,[1] the Executive Order directs the Secretary of the Treasury – in consultation with other relevant agencies – to report on the future of money and payment systems. Specifically, the Order requires an analysis of the potential implications that various designs of a U.S. CBDC might have in several distinct areas, including:
- economic growth and stability;
- financial inclusion and greater access to the financial system;
- private-sector-administered digital assets; and
- national security and financial crime, including a risk analysis addressing law enforcement interests such as money laundering and economic sanctions.
The analysis as directed by the Executive Order will also address the future of digital currencies globally, the potential impact on democracy, and the extent to which foreign CBDCs could displace existing currencies and could undermine the United States’ financial centrality.
The Executive Order encourages the Chairman of the Federal Reserve to continue its ongoing research on CBDCs, including evaluation of the necessary steps and requirements for the potential implementation and launch of a U.S. CBDC if doing so is judged to be in the interest of the United States. The Executive Order also directs the Attorney General to submit an assessment on whether legislative changes would be necessary to issue a United States CBDC and, if so, provide a corresponding legislative proposal.
Protecting U.S. Consumers, Investors, and Businesses
In light of perceived risks presented by the increased use of digital assets, exchanges, and trading platforms, the Executive Order directs members of the executive branch to provide reports addressing different topics related to the protection of consumers, investors, and businesses. Among other reports, the Secretary of the Treasury is to spearhead a report addressing the implications of digital assets’ adoption on the financial markets and payment systems. That report should provide policy recommendations, including potential actions for regulators and Congress.
The Executive Order asks the Director of the Office of Science and Technology Policy and the Chief Technology Officer of the United States to evaluate the technological infrastructure, capacity, and expertise that the relevant agencies would need to support introducing a U.S. CBDC. Additionally, it calls upon the Attorney General to report on the role of law enforcement agencies in detecting, investigating, and prosecuting criminal activity related to digital assets, including recommendations for regulatory and legislative actions. And it directs the Attorney General and federal regulators to consider the impact of digital assets on competition policy, the need for privacy and consumer protection measures, the need for market protection measures, and the possible impact that distributed ledger technologies may have on the efforts to address climate change given their energy use.
Concerning promoting financial stability, mitigating systemic risk, and strengthening market integrity, the Executive Order notes the role that federal regulators have played, as part of the Financial Stability Oversight Council (“FSOC”), to address risks that digital assets pose to financial stability and market integrity. The Executive Order directs the Secretary of Treasury to convene the FSOC in order to report on and make recommendations to address the risks to financial stability and regulatory gaps posed by various types of digital assets.
National Security Risks and Illicit Finance
The Executive Order notes the role that digital assets have played in facilitating cybercrime-related financial networks and their increased use to facilitate money laundering, terrorist financing, corruption, fraud, and theft. Given the ongoing efforts to develop the National Strategy for Combating Terrorist and Other Illicit Financing (“Strategy”), the Executive Order allows the relevant executive departments and agencies to submit supplemental annexes to the Strategy, which would offer additional views on illicit finance risks posed by digital assets. Within 120 days of the Strategy’s submission to Congress, the Secretary of Treasury is to develop a coordinated action plan to mitigate the digital‑asset-related illicit finance and national security risks.
International Cooperation
The Biden Administration, through the Executive Order, outlined its policy on fostering international cooperation and American competitiveness. Recognizing that technology-driven financial innovation is usually cross-border, the Administration acknowledged the need for continued international cooperation to ensure consistent regulation across jurisdictions. Accordingly, the United States will work closely with international partners on standards for the development and operation of digital payment architectures and CBDCs to create efficiencies and ensure that any new cross-border payment systems align with U.S. values and regulations. Consistent with that goal, the Executive Order directs the Secretary of the Treasury to establish a framework for interagency international engagement to adapt, update, and enhance adoption of global principles and standards for how digital assets are used and transacted and to promote the development of digital assets and CBDC technologies consistent with American values and legal requirements.
While it will be at least six months before we see the results of these cross-agency efforts, President Biden’s Executive Order provides insights into the Administration’s strategy to encourage innovation, identify and mitigate potential risks posed by digital assets, and maintain America’s leading position on the global economic stage. Although the Order calls for comprehensive analysis and reports from key regulatory stakeholders, it could serve as a catalyst for federal agencies to issue additional guidance on the application of existing regulations to digital assets. The time frame for the reports required by the Order signals a clear commitment from the current Administration to address the regulatory gaps regarding digital assets and potentially pave the way for implementation of a U.S. CBDC into the U.S. economy.
1. Clayton Stallbaumer and Brian Coughlan recently published a note on the Federal Reserve’s January 20, 2022 discussion paper, Money and Payments: The U.S. Dollar in the Age of Digital Transformation.