A Long-Awaited Effort to Clarify Regulation of Digital Assets and Cryptocurrency—Unpacking the Biden Administration’s New Executive Order

These developments have charged on in spite of, or in some cases thanks to, nonexistent or ambiguous regulations, while in other cases ill-fitting rules have impeded innovation. Existing legal regimes for financial institutions, securities, consumer protections, property rights, anti-money laundering and counterterrorism, and international cooperation were not designed for this rapidly evolving sector.

Entitled “Ensuring Responsible Development of Digital Assets,” the Executive Order provides directives for government agencies to conduct studies and prepare several reports (summarized in Appendix 1 below) to inform coordinated policy making across the digital asset space. While the focus is domestic policy, the Executive Order also emphasized the importance of international coordination efforts for what is now a global ecosystem. The coordination of this Executive Order and the efforts it initiates has been undertaken at the highest levels of the White House, National Security Council and Treasury.

The several reports directed by the Executive Order (listed in Appendix 1 below) present an opportunity for regulators to address these issues and for stakeholders to engage with both long-time agency leaders, political appointees and elected officials.

Subject Areas Covered

In the Executive Order, Biden called on agencies including the U.S. Treasury Department, the Federal Trade Commission (FTC), the U.S. Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), federal banking regulators and the Consumer Financial Protection Bureau (CFPB) to submit policy recommendations focused on consumer protection, central bank digital currencies, SEC areas of focus, financial crime, anti-money laundering and international coordination, among other areas. The scope of the mandate is extensive.

The Executive Order requests measures to:

• 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 the Illicit Use of Digital Assets.
• Promote U.S. Leadership in Technology and Economic Competitiveness to Reinforce U.S. Leadership in the Global Financial System.
• Support Technological Advances and Ensure Responsible Development and Use of Digital Assets. 
• Explore a U.S. Central Bank Digital Currency (CBDC).

The reports requested from the wide range of government agencies are to be issued over a three-to-twelve-month period and beyond, with the expectation that they will lead to future administrative rulemaking and Congressional legislation.

Implications of the Research and Reports Requested

The long list of participants shown in Appendix 1 below, and the “homework assignments” handed out to each agency, demonstrate a few things:

• Consistency and coordination among all federal agencies is critical, and a number of federal governing bodies are involved. This undertaking will depend on the willingness and ability of these varied participants to engage and coordinate collectively as imagined in this plan.
• The Secretary of the Treasury is positioned as the leader of many (and a participant in most) of the listed initiatives.
• The role of the United States, and the U.S. dollar as the global reserve currency more specifically, is an important interest reflected in these initiatives.
• The many players, touchpoints, and topics involved here present an opportunity for stakeholders to engage in shaping digital asset policy. In conducting this research and writing these reports, federal government agencies are expected to seek private sector input and assistance.

Political Context

It is important to note the political context in which these plans will develop: (a) the timing of the reports will bump up against the November elections, with the potential that the implementation phase will face a very different legislative branch; (b) among other legislators, Senator Lummis has reminded the president that Congress has already been and will continue to play a role in shaping the U.S. laws and regulations around cryptocurrency, and (c) certain agencies releasing reports, such as the SEC and CFTC, are independent agencies. Thus, the ultimate impact of the Executive Order remains to be seen.

Certain areas within the digital asset realm were not covered in the Executive Order, though they might fall into the topics addressed within the various reports as listed below. Indeed, the entire focus of the Executive Order seemed to revolve around the financial landscape of digital assets, ignoring the broad adoption of blockchain technology across multiple industries. Despite this narrow focus, plenty of room exists for regulators to address key issues in SEC and CFTC regulation, AML and the Bank Secrecy Act, and blockchain and smart contract issues touching on digital assets.

Important areas not covered include:

• A broad and practical definition of token.
• The SEC’s position on the Howey Test, although Section 6 of the Executive Order might be an opportunity for the SEC to coordinate with the CFTC to better define what sort of digital assets will fall under their respective purviews.
• NFTs, as the definition of “Digital Asset” at Section 9(d) skews toward cryptocurrencies and financial products, seeming to ignore other forms of tokens.
• Blockchain standards and commercial use outside of the financial space.
• Sanctions or sanctions evasion in an immediate sense. However, Section 7 on financial crime is expected to address those issues.

Takeaways and Next Steps

The Executive Order demonstrates for the first time an effort at deliberate and cohesive policy at the highest level for cryptocurrencies and digital assets. Regulators and industry stakeholders finally have a signal that the race has started to address a number of longstanding issues.

Given that the Administration is reaching out to get broad-ranging input before adopting formal policy in this industry, this effort could offer an opportunity for interested parties to engage with regulators through public comments, town halls, or lobbying and other advocacy efforts.

Digital currency markets responded favorably to the release of Treasury Secretary Yellen’s statement and the Executive Order itself, but the surge quickly cooled. The next six months and beyond will be formative in U.S. efforts to shape the regulatory environment for digital assets and their role in the U.S. and global economy.

For additional information about the topics raised in this alert, please contact any of the Pillsbury team members below:

Technology Transactions
Elizabeth Zimmer
David Johnson

Security and Commodity Laws
Daniel Budofsky

AML and Money Transmission Regulation
Deb Thoren-Peden

Sanctions and Technology Controls
Aaron Hutman

Litigation and SEC Enforcement
David Oliwenstein

Metaverse and NFT
Riaz Karamali

Intellectual Property 
Carolyn Toto

Tax
Megan Jones
Joshua Becker

Cyber and Data Security
Brian Finch
Aimee Ghosh

Appendix 1—Studies and Reports

The directives involve a number of federal governing bodies and cover a broad swath of crypto and digital asset regulatory areas, as further summarized in Appendix 1 above.