White House Fact Sheet on Digital Assets

The purpose of this blog post is to give an overview of the September 16, 2022 White House Fact Sheet on the Comprehensive Framework for Responsible Development of Digital Assets. The Fact Sheet was issued following the White House’s receipt of nine reports in response to President Biden’s Executive Order (EO) 14067 (discussed in my blog post here).

Specifically, the Fact Sheet is based on the following reports submitted to the President pursuant to EO 14067 (the fact sheet notes nine reports, but only seven are available at this time):

• Department of the Treasury, The Future of Money and Payments

• Department of the Treasury, Implications for Consumers, Investors, and Businesses

• Department of the Treasury, Action Plan to Address Illicit Financing Risks of Digital Assets

• White House Office of Science and Technology Policy (OSTP), Climate and Energy Implications of Crypto-Assets in the United States

• White House Office of Science and Technology Policy (OSTP), Technical Evaluation for a U.S. Central Bank Digital Currency System

• Department of Justice, The Role of Law Enforcement in Detecting, Investigating, and Prosecuting Criminal Activity Related to Digital Assets

• Department of Commerce, Responsible Advancement of U.S. Competitiveness in Digital Assets

GENERALLY

In general terms, the fact sheet is light on specifics and instead focuses more broadly on areas ripe for future regulation and gives general recommendations as to the scope and content of such regulations. The recommendations fall into these seven general categories:

• Protecting Consumers, Investors, and Businesses

• Promoting Access to Safe, Affordable Financial Services

• Fostering Financial Stability

• Advancing Responsible Innovation

• Reinforcing Our Global Financial Leadership and Competitiveness

• Fighting Illicit Finance

• Exploring a U.S. Central Bank Digital Currency (CBDC)

According to the fact sheet, the need for such recommendations stems from the significant growth of the digital asset market. Specifically, the fact sheet notes that 16% of adult Americans have purchased digital assets (which reached a market cap high of $3 trillion globally in November 2021), which presents both opportunities and challenges. The report specifically notes the crash of the stablecoin TerraUSD as a reason for more robust legislation/regulation.

Overall, the fact sheet reflects the input from a variety of “stakeholders” across government, industry, academia and civil society and articulates a “clear framework for responsible digital asset development and pave[s] the way for further action at home and abroad.”

PROTECTING CONSUMERS, INVESTORS, AND BUSINESSES

The report begins by noting the risks digital assets pose due to:

• volatility (noting for instance that the global market cap of crypto is 1/3 of its November 2021 high of $3 trillion);

• sellers “commonly mislead[ing]” consumers about digital assets’ features and expected returns;

• non-compliance with applicable laws and regulations (citing a WSJ study allegedly showing that nearly 25% of digital coin offerings had “disclosure or transparency problems like plagiarized documents or false promises of guaranteed returns”);

• outright fraud, scams and thefts (citing FBI statistics that digital asset scams were nearly 600% higher in 2021 than the previous year).

To combat these risks, the fact sheet states that the government plans to take the following steps:

1. Encourage regulators like the CFTC and the SEC to “aggressively pursue investigations and enforcement actions against unlawful practices in the digital assets space.”

2. Encourage the Consumer Protection Bureau and the Federal Trade Commission to “redouble their efforts to monitor consumer complaints and to enforce against unfair, deceptive, or abusive practices.”

3. Encourage agencies to issue guidance and rules to address current and emergent risks and to collaborate amongst one another and share data on consumer complaints to address risks facing consumers, investors and businesses.

4. Task the Financial Literacy Education Commission with leading 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

The fact sheet begins this section by noting that "roughly” 7 million Americans do not have a bank account and another 24 million rely on expensive nonbank services like check cashing and money orders for everyday needs. The fact sheet also explains that among those who do use bank services, such services can be costly and slow (particularly with respect to cross-border payments).

The fact sheet then explains that the Federal Reserve’s “FedNow” payment system (planned for 2023) will make payments “more efficient” by providing an “instantaneous” 24/7 interbank clearing system that will “further advance nationwide infrastructure for instant payments alongside The Clearinghouse’s Real Time Payments system.” The fact sheet notes that some “digital assets” could help facilitate faster payments and make financial services more accessible, but “more work is needed” on that front to avoid “predatory financial practices.”

The administration plans to take the following steps to achieve their goals:

1. Encourage the adoption of instant payments 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.”

2. Consider agency recommendations “to create a federal framework to regulate nonbank payment providers.”

3. Directing agencies to 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.”

4. Directing the National Science Foundation to support 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

The fact sheet begins by noting the potential instability caused by digital assets that are becoming increasingly intertwined with traditional banking systems. The fact sheet supports its position with the example of the May 2022 crash of the TerraUSD stablecoin and the subsequent wave of insolvencies that erased $600 billion in wealth.

The fact sheet then notes that in response, the administration has tasked the Financial Stability Oversight Council (FSOC) with publishing a report discussing digital assets’ “financial-stability risks, identifying related regulatory gaps, and making additional recommendations to foster financial stability.”

Aside from the above, the fact sheet outlines the following steps the administration plans to take in regard to fostering financial stability:

1. Tasking the Treasury Department with working 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.”

2. Tasking the Treasury Department with working with other agencies to “identify, track, and analyze emerging strategic risks that relate to digital asset markets” and to 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

The fact sheet first notes that as of 2022, the U.S. is home to about half of the world’s 100 most valuable financial technology companies, many of which are involved in digital asset services.

To continue fostering digital asset innovation, the fact sheet outlines that the administration will:

1. Task the Office of Science and Technology Policy (OSTP) and the NSF with developing 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.”

2. Task the NSF with supporting “social-sciences and education research that develops methods of informing, educating, and training diverse groups of stakeholders on safe and responsible digital asset use.”

3. Encourage the Treasury and financial regulators to “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.”

4. Encourage the Department of Energy and the Environmental Protection Agency to 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.”

5. Direct the Department of Commerce to 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.”

REINFORCING GLOBAL FINANCIAL LEADERSHIP AND COMPETITIVENESS

The fact sheet notes that the administration will take the following steps to reinforce the U.S’ financial leadership and to uphold U.S values in global digital asset markets:

1. Leverage U.S. agencies’ position in international organizations to message U.S. values related to digital assets and continue and expand their leadership roles on digital assets work at international organizations and standard-setting bodies—such as the G7, G20, OECD, FSB, Financial Action Task Force (FATF), and the International Organization for Standardization.

2. Increase The State Department, the Department of Justice (DOJ), and other U.S. enforcement agencies’ collaboration with and assistance to partner agencies in foreign countries through global enforcement bodies like the Egmont Group, bilateral information sharing, and capacity building.

3. Direct the State Department, Treasury, USAID, and other agencies with exploring “further technical assistance to developing countries building out digital asset infrastructure and services.”

4. Direct the Department of Commerce with helping U.S. financial technology and digital asset firms find a foothold in global markets for their products.

It should be noted that the above builds on the Department of Treasury’s fact sheet released earlier in the summer of 2022 regarding a framework for international engagement (discussed more here).

FIGHTING ILLICIT FINANCE

The fact sheet identifies the main areas of concern: money laundering, terrorist financing, hacks that result in the loss of funds and “fragilities, common practices and fast-changing technology” that may present vulnerabilities for misuse.

The fact sheet outlines the following steps to be taken to mitigate the above risks:

1. Evaluating whether to ask Congress to amend the Bank Secrecy Act (BSA), anti-tip-off statutes, and laws against unlicensed money transmitting to apply explicitly to digital asset service providers—including digital asset exchanges and nonfungible token (NFT) platforms.

2. Evaluating whether to ask Congress to raise the penalties for unlicensed money transmitting to match the penalties for similar crimes under other anti-money laundering (AML) statutes and to amend relevant federal statutes to allow the Department of Justice to prosecute digital asset crimes “in any jurisdiction where a victim of those crimes is found.”

3. Monitoring “the development of the digital assets sector and its associated illicit financing risks, to identify any gaps in our legal, regulatory, and supervisory regimes.”

4. Tasking the Treasury with completing an “illicit finance risk assessment on decentralized finance” by the end of February 2023, along with an assessment on non-fungible tokens by July 2023.

5. Continuing to encourage the relevant agencies and departments with exposing and disrupting illicit actors and addressing the abuse of digital assets.

6. Directing the Treasury to “enhance dialogue with the private sector to ensure that firms understand existing obligations and illicit financing risks associated with digital assets, share information, and encourage the use of emerging technologies to comply with obligations.”

   • This will be supported by a Request for Comment in the Federal Register for input on “several items related to AML/CFT.”

EXPLORING A U.S. CENTRAL BANK DIGITAL CURRENCY (CBDC)

The fact sheet explains that a CBDC has the potential to offer benefits such as:

• enabling a payment system that is more efficient, provides a foundation for further technological innovation, facilitates faster cross-border transactions, and is environmentally sustainable;

• promoting financial inclusion and equity by enabling access for a broad set of consumers;

• fostering economic growth and stability;

• protecting against cyber and operational risks;

• safeguarding the privacy of sensitive data;

• minimizing risks of illicit financial transactions;

• preserving U.S. global financial leadership;

• supporting the effectiveness of sanctions.

The fact sheet identifies one downside: the risk of a “bank run” on CBDC in times of stress.

To enhance the benefits and minimize the risk posed by a CBDC, the fact sheet explains that the administration has developed policy objectives for a U.S. CBDC system, which include:

“protecting consumers, promote economic growth, improve payment systems, provide interoperability with other platforms, advance financial inclusion, protect national security, respect human rights, and align with democratic values.”

The fact sheet then notes that further research and development of CBDC technology is needed and that the administration is encouraging the Federal Reserve to continue its ongoing CBDC research, experimentation and evaluation.

In this vein, the Treasury has been tasked with supporting the Federal Reserve by leading an interagency working group to consider “the potential implications of a U.S. CBDC, leverage cross-government technical expertise, and share information with partners.” The other agencies involved in this effort include the National Economic Council, the National Security Council and the Office of Science and Technology Policy.

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