The Biden administration wants to implement a strategy for digital assets to preserve the government’s ability to set monetary policy, regulate financial markets, ensure consumer protection and protect against illicit use of digital assets. Notably, much of this is being done without consideration for legislative efforts in Congress focused on the industry, none of which are expected to pass this year.
This go-it-alone attitude is starting to grate on Capitol Hill. Representative Pete Sessions (R-Tex.), a senior member of the House Financial Services Committee told an audience of crypto miners at an event in Round Rock, Texas, on Oct. 5, “… The White House is telling Congress they don’t need us to do anything regarding legislation for digital assets at this time.” Manuel Ortiz, a Democratic strategist close to the White House and founder and president of lobbying firm Vantage Knight, agreed with Sessions’ assessment of the administration’s position. “It was clear from the beginning that the tail wasn’t going to wag the dog, that digital asset technology wasn’t going to limit what the U.S. government is required to do under the law.” According to Ortiz, the White House has determined that the majority of the regulatory framework for digital assets was already covered under existing laws and a strategy of having regulators conduct enforcement actions would reel the industry in slowly to the executive branch’s approach.
As crypto increasingly enters the public consciousness, regulators and lawmakers are scrambling to find the right way to oversee its development. There are currently over 70 bills before Congress touching on crypto and blockchain, none of which seem likely to pass before this legislative session ends. In the meantime, the crypto market, which reached a market valuation of over $3 trillion before falling below $1 trillion has taken investors for a volatile ride.
In this climate, the White House has been attempting to align interagency efforts following the March 9 release of Executive Order 14067 on the Responsible Development of Digital Assets. According to Ortiz, the White House, Financial Services Oversight Committee (FSOC), Treasury and Federal Reserve were previously engaged in discussions on rules for digital assets.
The White House strategy is to avoid conflict with the industry, according to Ortiz, and instead slowly roll out policies via enforcement. The executive order broadly described six priorities for digital-asset policy including consumer and investor protection; promoting financial stability; countering illicit finance; U.S. leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation.
The release of a first-ever federal framework for digital assets on Sept. 16 detailed steps the administration would take to achieve the priorities. Brian Deese, national economic director, explains that the “order tasked agencies with doing deep analysis of digital assets’ risks and opportunities in submitting policy recommendations so that we can build a framework that harnesses the potential benefits while decisively mitigating the risks.” With nine reports from various U.S. agencies submitted to the president, Deese says the White House saw “a clear framework for responsible digital-asset development” that “paves the way for further action at home and abroad.”
Deese highlighted three White House priorities in a press briefing the day before the framework was made public: the urgent push for research and development of a central bank digital currency (CBDC), the mitigation of harm to consumers and the environment, and the creation of a research and development agenda.
Most of the outputs were long on aspirations and short on proposed action. That leaves regulatory actions as the prime route for implementing the administration’s goals. The sanction issued by the Treasury’s Office of Foreign Assets Control (OFAC) against Tornado Cash and the Commodities Futures Trading Commission’s (CFTC) action against Ooki DAO may represent this type of coordinated enforcement approach.
“We recommend that agencies continue to rigorously pursue their enforcement efforts focused on the crypto-asset sector. Agencies should use existing authorities to issue additional supervisory guidance and rules to address current and emerging risks,” Treasury Secretary Janet Yellen at a White House press conference on Sept.15.
The interagency process to develop a U.S. digital asset framework at the federal level consisted of at least 17 agencies required to participate and seven independent financial federal regulators encouraged to participate. Of what was made publicly available, nine reports on digital assets totaling 505 pages were sent to the White House and 326 public comments were received by U.S. agencies while compiling the reports.
Outlook and Implications
The next steps for the administration include finding the appropriate budgeting to fulfill the action items in the framework, according to Oritz. New funding is being proposed for traditional regulators such as the SEC to seek enforcement actions. However, these funds are not yet earmarked for crypto.
At the same time, the SEC and CFTC will likely continue their strategies of enforcement to rein in the digital-asset industry. The SEC has almost doubled the size of its enforcement team. There have been some regulatory turf wars that are hard not to notice, particularly as the SEC claims the vast majority of digital assets are securities, while the CFTC is open to categorizing others as commodities, which would put them under its remit.
Legislation such as the Lummis-Gillibrand Responsible Financial Innovation Act (RFIA) and the Digital Commodities Consumer Protection Act of 2022 (DCCPA) are designed in part to help settle the tension between the agencies. One limitation of the White House is that the financial regulators traditionally maintain independence from the administration when it comes to rulemaking, enforcement and jurisdictional disputes.
Legislation may help solve the remaining policy questions concerning digital assets that can help bring the industry under the administration’s framework. For instance, the DCCPA continues to gain momentum in the Senate and largely provides this authority to the CFTC to regulate crypto spot markets. There also remains a need for a federal payments-licensing regime for digital assets, which may be negotiated through a stablecoin bill that was recently being discussed between Maxine Waters (D-Calif.), who chairs the House Financial Services Committee, and Patrick McHenry (R-N.C.), the panel’s ranking Republican.
A Republican sweep of both Houses in next week’s elections may slow things down at the SEC and CFTC, where each commissioner has been nominated by President Joe Biden. The midterm elections will have minimal impact on the state of cryptocurrency regulation, since both bills for the spot markets of cryptocurrency and federal payments licensing are sought on a bipartisan basis.
The White House sought to establish an approach to digital assets without wanting to upset the crypto industry or rely on Congress for legislation. After concluding that the vast majority of laws covering digital assets were already on the books, the administration’s policy has been to encourage an enforcement approach by regulators to bring the digital asset industry in line with applicable regulations.
With one of the White House actions being to encourage the SEC and CFTC to double down on its enforcement actions, regulators such as the SEC, CFTC, and Treasury’s OFAC and Financial Crimes Enforcement Network should be expected to continue issuing enforcement actions. Additionally, potential new monies may be earmarked for digital asset enforcement to these regulators. As enforcement actions continue, these should be seen more as an overarching direction of policy from FSOC regarding the White House pressure to ensure it can set monetary policy, enforce the Bank Secrecy Act and other regulations in the financial markets, and mitigate illicit use of digital assets.
The administration’s approach limits the impact that pending legislation might have even if it moves forward. A change in the White House in 2024, rather than the results of the upcoming midterm elections, would be the next opportunity for major changes in U.S. crypto policy.