Biden’s EO on Ensuring Responsible Development of Digital Assets says nothing and everything

PRESIDENT BIDEN’S RECENT EXECUTIVE ORDER ON ENSURING RESPONSIBLE DEVELOPMENT OF DIGITAL ASSETS SAYS NOTHING AND EVERYTHING: NO SPECIFIC POLICIES WERE ANNOUNCED, HOWEVER, READING BETWEEN THE LINES, THE DIRECTION OF TRAVEL IS CLEAR.

THIS BLOG ANALYSES THE KEY POINTS RAISED IN THE EO AND THE POTENTIAL IMPLICATIONS FOR THE RAPIDLY EVOLVING WORLD OF DIGITAL ASSETS:

The EO is a huge statement of intent to position the US as the leader in digital assets. The choice of the term digital assets (and the minimal use of "cryptocurrency") is telling - the US is looking to create a framework for the broadest possible application of digital assets and sees cryptocurrency as only a part of this.

Long-term, there will be a lot of value in digital assets, but potentially this might not include much of the existing world of cryptocurrencies.

The US regulatory framework will be build upon existing securities laws, banking regulation and BSA/AML rules. There will be no bespoke framework or new regulatory agency for digital assets. This is unsurprising, given the SEC's recent enforcement actions, e.g. against BlockFi.

Many crypto-asset firms will need to take substantial steps to comply with existing securities and banking laws. The compliance gap for traditional financial services firms (“TradFi”) is minimal but these firms will need to wrap their heads around new risks inherent to digital assets.

National security takes a front row seat. The EO makes it clear that digital assets must facilitate the full implementation of BSA/AML and sanctions. We can argue the effectiveness of the rules but it is clear that the administration is intent on driving compliance.

This will be challenging for some digital asset firms, especially in the DeFi space.

The US has significant environmental concerns about Proof-of-Work.

While many Bitcoiners may contest the energy consumption statistics, we expect to see this drive a substantial change in the Bitcoin energy mix (towards more renewables) in the next few years. The alternative (as is also being pushed by the Greens in the European Parliament) may be an eventual ban on PoW mining.

The Federal Reserve will accelerate its analysis of a "Digital Dollar" CBDC, with objectives for financial inclusion and privacy included alongside securing the primacy of the US dollar in the international economy.

Given the progress other countries (esp. China) have made with their CBDC initiatives, we expect that a digital dollar will be launched in the second half of this decade.

From an implementation perspective, the EO emphasizes a whole-of-government approach. This is essential as many of the key issues and risk in digital assets cut across agency jurisdictions. We will wait and see how effectively the agencies collaborate, bearing in mind the challenges experienced during the implementation of Dodd-Frank.

We expect 2022 to be a pivotal year for the regulation of digital assets. Along with the proposed policy initiatives set out in Biden’s EO, the EU is in its trilogue process for the forthcoming Markets in Crypto-Assets (MiCA) regulation and in the UK, the Treasury is expected to set out changes to the regulatory perimeter to encompass digital assets.