President Biden Mulling’s Executive Order on Cryptocurrencies: What to Watch Out For | Brownstein Hyatt Farber Schreck
The Biden administration is would have consider issuing an executive order that would create a whole-of-government approach to the oversight and regulation of cryptocurrencies. Such an order would likely have significant implications for how cryptocurrencies are offered and traded, used to purchase goods and services, and stored. More broadly, the recommendations and conclusions developed as part of this process could have a significant impact on the value of these assets (including cryptocurrencies, non-fungible tokens (NFTs) and smart contracts) and on the quality and the pace of blockchain deployment. technology for other applications.
The decrees are generally non-binding on independent agencies, such as the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). A decree may, however, direct the Secretary of the Treasury, as head of the Financial Stability Supervisory Board (FSOC), to coordinate regulations among financial regulators, including independent agencies, and provide a new policy framework for this. to do. (The Biden administration used this approach in May 2021 when it comes to climate-related financial risk.) A cryptocurrency executive decree would likely direct the FSOC to use its convening authority to promote key priorities, including investor and consumer protection. , systemic risk mitigation, tackling bad actors and preemptive treatment of existing state laws. Below, we take a look at these key areas.
Protect investors and consumers
With billions of dollars traded every day around the world in cryptocurrencies like Bitcoin, Tether, and Ethereum, and made available to retail investors, one of the primary goals of any executive order will likely be whether investors are properly protected in the context of their purchase, custody and trading of digital assets. In general, for financial assets sold to retail investors, this means some level of initial risk disclosure, guarantees regarding broker recommendations, regulation of the safe custody of those assets, and measures to reduce risk. fraud and demand fairness in the market in which the assets are sold. In the cryptocurrency landscape, however, jurisdiction over these investor protections is shared between the SEC, which regulates securities, and the CFTC, which regulates commodity futures using a limited mandate to control. fraud and manipulation of commodity prices. To date, Bitcoin has been treated as a commodity under the sole jurisdiction of the CFTC; the classification of other cryptocurrencies remains murky.
As we have previously Underline, the SEC now believes it has sufficient powers under existing legal frameworks to regulate at least some digital assets, although its conclusion that some assets are “securities” has yet to be thoroughly tested. by federal justice. The SEC sent at least a Wells Notice regarding a proposed stablecoin-backed loan project, but has not publicly disclosed its legal argument as to why the arrangement meets the definition of a security. Unlike traditional equity or debt instruments, many cryptoassets derive significant value from their utility function, not the promise of a return on investment.
Members of Congress have their own divergent views on how digital assets should (or shouldn’t) be regulated. House Financial Services Committee ranking member Patrick McHenry (R-NC) recently presented the Digital Token Clarity Act, 2021, which would provide a legal safe harbor from the Securities Act of 1933 registration requirement for tokens with certain characteristics. Representative Rashida Tlaib (D-Mich.) Presented a invoice at the last Congress to restrict the issuance of stable coins to depository institutions insured with the authorization of the Federal Reserve system. Bipartite legislation who passed the House this year would ask the SEC to work with the CFTC in a joint task force to explore a coordinated approach.
Identify and mitigate systemic risk
In addition to facilitating regulatory cooperation in the investor protection landscape, the FSOC has broad legal power to identify and address non-bank financial corporations and / or activities that could pose risks to the financial stability of states. -United. This statutory authority could allow the FSOC to develop new cryptocurrency regulations—even if it is not allowed under existing securities or commodity laws – if the FSOC determines that cryptocurrencies “create or increase liquidity, credit risk, or other problems spread among. . . United States financial markets. Dodd-Frank Law § 120 (b), (c) (emphasis added). The FSOC’s broad powers under the Dodd-Frank Act may prove to be the battleground for the future of digital asset regulation due to its broad “super-regulatory” powers.
The power of the FSOC to regulate digital assets in the name of mitigating systemic risk has caught the attention of top lawmakers on Capitol Hill. For example, in a July 26, 2021, letter, Senator Elizabeth Warren (D-Mass.) called on the FSOC to implement a “coordinated and coherent regulatory strategy to mitigate the growing risk that cryptocurrencies pose to the financial system.” More recently Pat Toomey (R-PA), a ranking member of the Senate Banking Committee, hit back, Warning that the FSOC’s stablecoin regulations “would cause enormous damage to emerging technology” and “violate the legal standard of designation” under Section 120 of the Dodd-Frank Law. Regardless of the political divide in Congress, any executive order on cryptocurrencies would likely require Secretary Janet Yellen to review and, where appropriate, use her broad powers to regulate and oversee cryptocurrencies which, in the collective judgment of the FSOC , could pose a systemic risk.
Policeman the bad actors
An executive order would also ask regulators to increase their oversight and enforcement activities regarding the use of cryptocurrencies for illegal purposes. In recent years, malicious actors (often not based in the US) have demanded a ransom for the release of hostages or for the removal of malware from corporate systems in the form of cryptocurrency due to the anonymity and immediate settlement that digital transactions can provide. An executive order would likely direct the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) to focus more on this trend, including finalizing its proposed 2020 rule regarding the enforcement of Bank Secrecy record-keeping requirements. Act and the “travel rule” for convertible virtual currencies. In addition to the work of FinCEN, the Ministry of Justice recently established a new national cryptocurrency enforcement team to focus on prosecuting the criminal abuse of digital currency. Given the globalized crypto-asset market and the increasingly sophisticated use of electronic tools by criminal enterprises, we anticipate that these elements will be included in any executive decree on this subject.
Preemption from state law
A number of states have already enacted legislation affecting the cryptocurrency landscape. Wyoming and Nebraska, for example, allowed state-approved banks to obtain charters to accept cryptocurrency; Wyoming has established a state chancellery court to rule on any issues arising from disputes related to cryptocurrency or digital assets. The state of Ohio had a program in 2018 that allowed business owners to pay their tax bills in cryptocurrency. A number of other jurisdictions are considering legislation to attract the crypto industry to their states, especially now that China has effectively banned the production and circulation of cryptocurrencies, further opening the door for U.S. dominance in the world. ‘industry. An executive order would likely encourage the FSOC to explore whether and how federal regulatory policy should either rely on existing state laws, leaving states as “laboratories of democracy” or pre-empt it with a uniform federal policy. In the latter case, we envision a long future of jurisdictional clashes between laws and state and federal agencies with key federal decision-makers (e.g. Senator Cynthia Lummis (R-WY)) heavily involved.
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It remains unclear whether President Biden will in fact issue a cryptocurrency executive order, but even in the absence of one, the federal government is already busy figuring out if and how to regulate this relatively new market to protect investors. and the customers and the integrity of the markets in which they trade or spend their crypto-assets. But even without an executive order, Secretary Yellen convenes the FSOC this week to discuss a stablecoins report being prepared by the president’s financial markets task force. Given the range of financial regulators involved and the growing attention digital assets are receiving from Capitol Hill, participants in the crypto market are well advised to engage early and often with policy makers to ensure that their respective views are taken into account as the government develops a regulatory framework.