On March 9, President Biden signed an executive order that outlined a federal approach to the risks and potential benefits of digital financial assets and associated technology. It also calls for the research and development of a U.S. Central Bank Digital Currency (CBDC) that will protect U.S. interests and implement monetary and fiscal policies for digital currency. The President outlined six key priorities to be addressed by the order.
- Protection of U.S. consumers, investors and businesses: If the appropriate protections and oversight are not in place, digital assets present unique risks to consumers, investors and businesses. The order aims to ensure that the proper safeguards are in place for responsible digital asset development.
- Protection of U.S. and global financial stability and mitigation of systemic risk: Digital assets may present new and unique economic and financial risks that require a new regulatory approach. The order asks for a coordinated inter-agency approach to identify and mitigate these risks.
- Protection from illicit finance and national security risks resulting from the misuse of digital assets: Illicit financial risks, including money laundering, cybercrime and ransomware, narcotics, human trafficking, terrorism and proliferation financing. The order seeks to ensure the appropriate controls are in place to promote transparency, security and privacy.
- Promote U.S. leadership in the global financial system and in technological and economic competitiveness: The order addresses the need for the responsible development of payment innovations and digital assets to promote continued U.S. leadership and competitiveness in the global financial system.
- Promote equitable access to safe and affordable financial services: The executive order addresses the need to mitigate inequitable impacts — particularly for those underserved by the traditional banking system — and promotes innovations that would expand equitable access to financial services.
- Support technological advances and ensure responsible development and use of digital assets: Digital assets technology may substantially impact financial systems, privacy, operational security, climate change and exploitation. The order seeks to ensure that these technologies are developed, designed and implemented in a responsible manner.
“Within 180 days of the date of this order, the Director of the Office of Science and Technology Policy and the Chief Technology Officer of the United States, in consultation with the Secretary of the Treasury, the Chairman of the Federal Reserve, and the heads of other relevant agencies, shall submit to the President a technical evaluation of the technological infrastructure, capacity, and expertise that would be necessary at relevant agencies to facilitate and support the introduction of a CBDC system should one be proposed.”
What’s the impact for financial services firms?
While the true impact of this executive order will be better understood in the coming weeks, a few things are already clear:
- Cryptocurrency is here to stay: If there had been any doubt about the legitimacy and future of cryptocurrency, it should no longer be uncertain. This order simply adds to similar moves by other countries around the world in calling for the legal structure, definition of oversight responsibility, and due diligence required to manage the impact.
- Consumers will not be denied: The U.S. government seems to assert that some technology-savvy consumers want to tie investments in Bitcoin and Ethereum to their bank accounts. On the other end of the spectrum, the “unbanked” want to buy and sell without the cost, overhead and complexity of dealing with the established financial market. With or without immediate government action, digital asset and crypto innovation will not be undeterred.
- Same business, same rules: As stated in the order, much of the regulatory underpinnings of each topic have been in place. The goals of protecting investors while ensuring the stability of the financial system remain unchanged. In the case of securities and communications that are used to reach the market, the same recordkeeping, storage and oversight requirements will still apply for new FinTech participants, as well as any established firm that is seeing the order as a green light to accelerate investment in this area.Regardless of the order’s outcomes in the next few months, it would be highly unlikely to see a change to the existing U.S. map of “who regulates what.” As it stands:
- Securities: Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA)
- Derivatives: CFTC
- Currency (and, likely, any form of CBDC): Federal Reserve and Office of the Comptroller of the Currency (OCC)
- Consumer protection: Consumer Financial Protection Bureau (CFPB), SEC, and FINRA
- Same business, new risk: Despite the language indicating that risks are the same, the expansive market impact of crypto will bring new sources of supply and demand from less sophisticated investors, using communications tools like TikTok, Instagram, and Reddit that may be outside of existing risk management parameters.Firms must understand where this intersection of supply and demand will take place and ensure they have policies and training so that newer participants are properly informed of the risks, and have visibility into new communications sourcesthat may be breeding grounds for fraud and investor abuse. The time to inspect existing infrastructure to account for these incremental risks is now.
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Will a new self-regulating organization (SRO) emerge?
Notably missing from the order was a new self-regulating organization (SRO) for digital assets. There has been a lot of debate as to whether a new digital asset SRO would set regulations and perform oversight and examinations, possibly in conjunction with the traditional regulators.
Some regulators such as the SEC, FINRA, and Commodity Futures Trading Commission (CFTC) have already begun to provide guidance on addressing the risks associated with digital assets — with a focus on protecting investors and providing full and fair information to the public.
Additionally, we’ve seen an increase in enforcement actions against individuals and firms in the last two years.
As indicated in American Banker’s article, “What’s next after Biden’s crypto order” there are many different points of view and a lot of speculation on what the outcome of the order will be, but everyone should agree that we’ve reached a pivotal point where new regulations will shape the future of digital assets.
What to do now
The President’s executive order provided tight deadlines for agencies to submit responses — signaling the likelihood of seeing meaningful impacts before year’s end. We recommend closely monitoring proposals by the SEC, CFTC, Federal Trade Commission (FTC) and other agencies on how to approach the protection of consumers, investors and businesses.
Firms should consider how their use of digital assets will either fit into, or require an update to, their current supervisory practices and recordkeeping regimen. How will you monitor activities around digital assets? You must have adequate measures in place to supervise and review these activities under the appropriate regulations.
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Source: Smarsh – Authors: Robert Cruz & Tiffany Magri
About the author:
Tiffany Magri – Regulatory Advisor at Smarsh
As a Regulatory Advisor at Smarsh, Tiffany monitors, evaluates and consults on the financial services regulatory landscape. Tiffany has more than 10 years of experience facilitating compliance with laws and regulations, policies, and risk management. Prior to joining Smarsh, Tiffany was a Senior Associate at Benefit Street Partners and a Compliance Analyst at Broadstone and Manning & Napier Advisors.
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