Please forgive some members of the FinTech community for remembering President Ronald Reagan’s comment: “The nine most terrifying words in the English language are: ‘I’m From the Government and I’m Here to Help.’” President Biden recently signed an Executive Order on Ensuring Responsible Development of Digital Assets (the “Order”) that instructs various agencies of the Federal Government with respect to the development of digital assets.¹ The Order announces the intention of the United States to develop a comprehensive federal approach to harness the opportunities posed by digital assets, central bank digital currencies (“CBDCs”),² and to understand and mitigate against the corresponding risks.

The authors applaud the President for his commitment to the development of digital assets and blockchain.³ However, we fear the Order includes a process that will prove unnecessarily laborious and that will negatively impact the speed of innovation.⁴ The questions of concern to the industry are:

1. What constitutes “responsible development of digital assets”;
2. Who gets to decide what constitutes “responsible development of digital assets”; and
3. Will the involvement of the Federal Government help or hinder the development of digital assets.

The Biden administration identified six policy priorities in the Order, requiring the production of a number of reports on digital assets, blockchain technology, and CBDCs:

Consumer and Investor Protection

The first policy objective in the Order recognizes the increased use of digital assets and digital asset trading platforms may increase the risks of crimes and other violations of the law, privacy and data breaches, unfair and abusive acts or practices, and other cyber incidents faced by consumers, investors, and businesses. The Order acknowledges the rise of digital assets may present disparate financial risk to less informed market participants. It is critical to ensure that digital assets do not pose undue risks to consumers, investors, or businesses, and to put in place protections as a part of efforts to expand access to safe and affordable financial services.

Much of the Order focuses on efforts to protect consumers from the possible risks associated with the development of digital assets. The authors believe consumer protection will be a focus of the U.S. Securities and Exchange Commission (“SEC”), the U.S. Commodity Futures Trading Commission (“CFTC”), the Consumer Finance Protection Bureau (“CFPB”), and other agencies as part of their work pursuant to the Order.

Financial Stability and Mitigating Systemic Risks

The second policy objective in the Order requires the Secretary of the Treasury to convene the Financial Stability Oversight Council (“FSOC”) to produce a report outlining the specific financial stability risks and regulatory gaps posed by various types of digital assets and providing recommendations to address such risks. The Order requires the report to consider the particular features of various types of digital assets and include recommendations that address the identified financial stability risks posed by these digital assets, and proposals for additional or adjusted regulation, and supervision as well as for new legislation.

The authors believe the involvement of FSOC may result in some digital asset companies being deemed a systemically important financial institution (“SIFI”) and would result in those institutions being regulated by the Federal Reserve or the Office of the Comptroller of the Currency (“OCC”). Efforts to promote fair, efficient, and orderly markets falls squarely with the duties of the SEC. However, the Order fails to mention how digital assets may play a role in facilitating capital formation which is also a duty of the SEC.

Addressing the Potential for Illicit Finance and National Security Risks

The third policy objective in the Order recognizes that the growing use of digital assets in financial activity heightens risks of crimes such as money laundering, terrorist financing, fraud and theft schemes, and corruption. The Order requires the submission of views on illicit finance risks posed by digital assets, including cryptocurrencies,⁵ stablecoins, CBDCs, and trends in the use of digital assets by illicit actors. The order requires the development of a coordinated action plan based on the Strategy’s conclusions for mitigating the digital‑asset-related illicit finance and national security risks addressed in the updated strategy. The Order appears to bring a strong national security and crime prevention focus into the consideration of the regulation of digital assets.

U.S. Leadership in the Global Financial System and Economic Competitiveness

The fourth policy objective in the Order reinforces the commitment of the United States to a leadership role in the global financial system and in technological and economic competitiveness, including through the responsible development of payment innovations and digital assets. The United States has an interest in ensuring that it remains at the forefront of responsible development and design of digital assets and the technology that underpins new forms of payments and capital flows in the international financial system. The Order notes such efforts should focus on setting standards that promote:

1. Democratic values;
2. The rule of law;
3. Privacy;
4. The protection of consumers, investors, and businesses; and
5. Interoperability with digital platforms, legacy architecture, and international payment systems.

Equitable Access to Safe and Affordable Financial Services

The fifth objective in the Order focuses on the promotion of equitable access to safe and affordable financial services as a U.S. national interest, including for communities with historically insufficient access to such services. The Order requires the Secretary of the Treasury to work with other agencies to produce a report addressing the future of money and payments systems and corresponding implications for underbanked communities. The Order affirms the need for safe, affordable, and accessible financial services, avoiding disparate impact, and requires the Secretary of the Treasury to prepare a joint agency report on the future of money and payments systems to include implications for economic and financial growth, inclusion, and national security. The Order is a commitment to FinTech and financial inclusion which has been supported by groups focused on the Community Reinvestment Act (“CRA”).⁶

Fostering Responsible Digital Asset Innovation

The sixth policy objective in the Order recognizes the United States should:

1. Ensure that safeguards are in place and promote the responsible development of digital assets to protect consumers, investors, and businesses; maintain privacy; and
2. Shield against arbitrary or unlawful surveillance, which can contribute to human rights abuses.

The Order seeks to increase efforts to study and support technological advances while prioritizing privacy, security, illicit exploitation and reducing negative climate impacts.

United States Central Bank Digital Currency

The Order also recognizes the need to conduct research and development efforts into the potential design and deployment of a United States CBDC. These efforts include:

1. Assessments of possible benefits and risks for consumers, investors, and businesses;
2. Financial stability and systemic risk;
3. Payment systems; national security;
4. The ability to exercise human rights;
5. Financial inclusion and equity; and
6. The actions required to launch a United States CBDC if doing so is deemed to be in the national interest.

The Order states that 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, as appropriate. The Order recognizes the potential to support efficient and low-cost transactions, particularly for cross‑border funds transfers and payments, and to foster greater access to the financial system, with fewer of the risks posed by private sector-administered digital assets. The Order notes that a United States CBDC that is interoperable with CBDCs issued by other monetary authorities could facilitate faster and lower-cost cross-border payments and potentially boost economic growth, support the continued centrality of the United States within the international financial system, and help to protect the unique role that the dollar plays in global finance.

The Order requires the Secretary of the Treasury to submit to the President a report on the future of money and payment systems, including:

1. The conditions that drive broad adoption of digital assets;
2. The extent to which technological innovation may influence these outcomes; and
3. The implications for the United States financial system, the modernization of and changes to payment systems, economic growth, financial inclusion, and national security.

The report must include an analysis of:

1. The potential implications of a United States CBDC, based on the possible design choices, for national interests, including implications for economic growth and stability;
2. The potential implications a United States CBDC might have on financial inclusion;
3. The potential relationship between a CBDC and private sector-administered digital assets;
4. The future of sovereign and privately produced money globally and implications for our financial system and democracy;
5. The extent to which foreign CBDCs could displace existing currencies and alter the payment system in ways that could undermine United States financial centrality;
6. The potential implications for national security and financial crime, including an analysis of illicit financing risks, sanctions risks, other law enforcement and national security interests, and implications for human rights; and
7. An assessment of the effects that the growth of foreign CBDCs may have on United States interests generally.

The Order also requires the Chairman of the Board of Governors of the Federal Reserve System:

1. To continue to research and report on the extent to which CBDCs could improve the efficiency and reduce the costs of existing and future payments systems;
2. To continue to assess the optimal form of a United States CBDC; and
3. To develop a strategic plan for the Federal Reserve and broader United States Government action, as appropriate, that evaluates the necessary steps and requirements for the potential implementation and launch of a United States CBDC.

Fostering International Cooperation and United States Competitiveness

The Order requires the Secretary of the Treasury to establish a framework for interagency international engagement with foreign counterparts and in international fora to, as appropriate, adapt, update, and enhance adoption of global principles and standards for how digital assets are used and transacted, and to promote development of digital asset and CBDC technologies consistent with our values and legal requirements.

Coordination

The Assistant to the President for National Security Affairs and the Assistant to the President for Economic Policy shall coordinate, through the interagency process described in National Security Memorandum 2 of February 4, 2021 (Renewing the National Security Council System), the executive branch actions necessary to implement this order. It is unclear if either of the Assistants to the President have any substantive knowledge or experience with blockchain technology, digital assets, CBDCs, or the regulation of FinTech.

The Order directs coordinated action across U.S. Government agencies to curb the use of digital assets in illicit finance, and the use of digital assets to create national security risks (through activities such as ransomware, money laundering, terrorist and proliferation financing, fraud and theft schemes, and corruption). The Order also directs U.S. Government agencies to coordinate with international partners to develop a framework for responding to these risks across borders. The Department of Commerce is directed to work across the U.S. Government to establish a framework to advance U.S. economic leadership in leveraging digital assets and competitiveness in this emerging space.

Chinese CBDC

The United States appears to be at least four to seven years behind China in the development of a CBDC. China’s planned expansion of their CBDC and the potential for it to be expanded to include a wholesale application present a substantial potential risk to the continuing position of the U.S. dollar as the global reserve currency. Once China has made their CBDC available to all of its citizens and once it makes a wholesale version available as part of China’s Belt and Road Initiative, it will have the ability to offer favorable exchange rates to all users of their CBDC outside of China. The global use of China’s CBDC will likely weaken the status of the U.S. dollar as the global reserve currency.

Unlike other nations that are currently exploring CBDCs, China has not demonstrated a level of commitment to the privacy rights to its citizens in a manner comparable to the protections offered in other countries. The expansion of the Chinese CBDC as a global currency will create a mechanism by which the Chinese government could capture massive amounts of information about users of the currency in countries around the world. Should China elect to sell securities, including Chinese government and corporate debt securities using the Chinese CBDC, or permit their CBDC to be used to purchase equity securities, the amount of information that could be gathered on purchasers by the Chinese government could be a threat to the global economy and U.S. national security.

Conclusion

While the authors of the alert do not share the pessimistic sentiment of President Reagan with respect to the involvement of the Federal Government in the development of digital assets, time will tell if the involvement will have a positive impact. The authors are concerned the Order appears to position government officials that do not have substantial experience with digital assets or blockchain technology to lead the effort set forth in the Order instead of positioning the agencies with the most experience in the area (i.e., the SEC, CFTC, and OCC) to lead the effort. Finally, while the authors applaud President Biden for issuing an Order that will produce a number of reports on aspects of digital assets and blockchain technology, we are concerned the Order and required reports will move at a pace that puts the United States further behind China in the development of blockchain technology and digital assets.

1. ^{The term “digital assets” refers to all CBDCs, regardless of the technology used, and to other representations of value, financial assets, and instruments, or claims that are used to make payments or investments, or to transmit or exchange funds or the equivalent thereof, that are issued or represented in digital form through the use of distributed ledger technology. For example, digital assets include cryptocurrencies, stablecoins, and CBDCs. Regardless of the label used, a digital asset may be, among other things, a security, a commodity, a derivative, or other financial product. Digital assets may be exchanged across digital asset trading platforms, including centralized and decentralized finance platforms, or through peer-to-peer technologies. Executive Order on Ensuring Responsible Development of Digital Assets (Mar. 9, 2022).}
2. ^{The term “central bank digital currency” or “CBDC” refers to a form of digital money or monetary value, denominated in the national unit of account, that is a direct liability of the central bank. Id.}
3. ^{The term “blockchain” refers to distributed ledger technologies where data is shared across a network that creates a digital ledger of verified transactions or information among network participants and the data are typically linked using cryptography to maintain the integrity of the ledger and execute other functions, including transfer of ownership or value.}
4. ^{Richard B. Levin and Kevin R. Tran, A day late and a digital dollar short: Central bank digital currencies (2022), available here.}
5. ^{The term “cryptocurrencies” refers to a digital asset, which may be a medium of exchange, for which generation or ownership records are supported through a distributed ledger technology that relies on cryptography, such as a blockchain.}
6. ^{The CRA requires the Federal reserve and other federal banking regulators to encourage financial institutions to help meet the credit needs of the communities in which they do business, including low and moderate income communities.}