Alert 03.11.22
Alert
05.24.22
On May 19, 2022, the U.S. Department of Commerce’s International Trade Administration (ITA) issued a request for comment (RFC), seeking public input and recommendations on U.S. policy relating to digital assets as part of Commerce’s response to a directive from President Biden in Executive Order (E.O.) 14067, issued on March 9. The RFC asks specific questions on U.S. competitiveness in digital assets both globally and domestically, digital asset mining, the impact of central bank digital currencies (CBDCs), positions that the U.S. government might give consideration in trade agreement negotiation, how digital asset networks differ from traditional asset finance and financial institutions, security and privacy in relation to digital assets, interoperability of digital asset networks and the relation of the above to various U.S. policy initiatives.
Section 8(b)(iii) of the Executive Order directed the Secretary of Commerce to consult with the Secretary of State, Secretary of the Treasury, and the heads of any other relevant agencies to establish a framework for enhancing U.S. economic competitiveness in, and leveraging of, digital assets. This section of the Executive Order is only one of many components that comprise its extensive scope, which seeks to address non-existent or ambiguous regulations related to digital assets. This RFC is the second of its kind in relation to the Executive Order. The first came on March 25, 2022, from the Office of Science and Technology Policy (OSTP), which was directed to understand and mitigate the energy use and climate risks of digital assets.
The RFC
The stated purpose of the RFC is to gather input and recommendations from the public, including industry stakeholders, for consideration in the development of the Commerce Department’s framework. As defined by the Executive Order and used in the RFC, “digital assets” are central bank digital currencies (CBDCs), and 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 their equivalents, that are issued or represented in digital form using distributed ledger technology. The RFC specifically mentions cryptocurrencies, stablecoins and CBDCs. This broad scope can potentially include numerous digital assets and related services, such as tokenized share offerings, non-fungible tokens (NFTs), blockchain real estate rights, decentralized finance (DeFi) and various evolving metaverse assets.
The forthcoming framework would therefore affect a number of new market actors, ranging from miners to wallets, digital asset platforms and decentralized autonomous organizations (DAOs), as well as more traditional financial services providers that may be moving into the digital asset sector. The RFC acknowledges that digital assets may be securities, commodities, derivatives or other financial products. It will be interesting to see how the framework will work with existing and new regulations imposed by the mosaic of regulators with jurisdiction over such financial products (such as the Securities and Exchange Commission and the Commodity Futures Trading Commission).
Although the ITA welcomes input on any matter that may be relevant to the framework, it provided 17 specific questions that indicate the areas the ITA is particularly focused on. The RFC arranged these 17 questions into three categories: competitiveness, comparisons to “traditional” financial services and financial inclusion and considerations, and technological development.
Subject Areas Covered
Most of the competitiveness-related questions focus on understanding stakeholders involved in U.S.-based digital asset businesses, the features of these businesses that make them competitive internationally, and how the U.S. regulatory landscape helps or hinders their ability to remain competitive. Some competitiveness-related questions also speak directly to digital asset mining businesses by inquiring into their capacity to remain competitive internationally while pursuing more sustainable, low-carbon operations. Other questions ask how U.S.-based digital asset businesses can recruit and retain talent and acknowledge that the deployment of CBDCs may affect the success of existing digital asset businesses. These questions also contain an inquiry as to whether digital assets should be given specific consideration in trade agreements—an important issue given the current focus on digital assets both at the intranational and international level.
The second category focuses on how U.S.-based digital asset businesses could learn from the success of U.S.-based traditional financial service businesses based on similarities and differences between the two, with particular focus on international payments and the democratization of finance, specifically, providing households with enhanced access to safe, affordable and reliable financial services.
The third category of questions relates to the technological development of digital assets, such as the adoption of standards, addressing security concerns and consideration of interoperability across different digital assets. The ITA appears to be looking at the implications of harmonizing the operation of various digital asset networks to protect consumers’ assets, personal information and other sensitive data. Proponents of decentralized blockchain technologies that facilitate the use of digital assets believe decentralized systems are more resistant to failure and insider attacks, but these systems are not immune to fraud or other security risks, as well as risks of money laundering and theft from a user’s accounts.
The ITA also welcomes input on any topic that commenters believe is relevant to Commerce’s responsibility to enhance U.S. economic competitiveness in digital assets internationally.
Takeaways and Next Steps
Commerce’s efforts to gather public input was an expected step following the issuance of E.O. 14607, but it offers an initial opportunity for stakeholders to comment on and begin to help shape the Biden Administration’s attempts to develop practical and informed digital asset regulations.
Other agencies named as responsible contributors to providing President Biden with a federal approach on regulating the U.S. digital assets sector may make similar calls to the public leading up to the President’s deadline of September 5, 2022. The OSTP and the ITA may have been the first agencies to do so, but they will likely not be the last. Additionally, international advisory boards like the Financial Stability Board—whose members represent institutions from 24 countries, including the U.S.—recently made calls to G7 Finance Ministers to continue the regulatory development process with a heightened sense of urgency given the recent international market turmoil caused by the de-pegging of algorithmic stablecoin, TerraUSD (UST).
Written comments must refer to docket ITA-2022-0003 and must be submitted through www.regulations.gov or by email to DigitalAssets@trade.gov on or before 5 pm ET on July 5, 2022.
The authors would like to thank summer law clerk Nathan Lewko for his contributions to this client alert.
For additional information about the topics raised in this alert, please contact any of the Pillsbury team members below:
Technology Transactions
Security and Commodity Laws
AML and Money Transmission Regulation
Sanctions and Technology Controls
Litigation and SEC Enforcement
Metaverse and NFT
Intellectual Property
Tax
Cyber and Data Security
Banking Regulation
M&A and Investments
Brian McKenna