Treasury Report on Digital Asset Risk

The Financial Stability Oversight Council (FSOC) of the Treasury Department released a report on “Digital Asset Financial Stability Risks and Regulation.” The FSOC was asked to produce the report as part of the deliverables of President Biden’s March digital assets Executive Order (EO). The EO charged the FSOC with identifying and mitigating systemic financial risks posed by digital assets and developing appropriate policy recommendations to address any regulatory gaps.

Among the key findings as outlined in the report’s Fact Sheet:

• The stability of the U.S. financial system is at risk if digital asset activities grow in their connection to the traditional financial system, or their overall scale, without adherence to appropriate regulation, including enforcement within the existing regulatory structure.

• Many nonbank firms in the crypto-asset ecosystem say they are regulated, but that may be deceptive in that financial stability may not be comprehensively regulated. For example, certain crypto-asset platforms may be listing securities but are not in compliance with exchange or broker-dealer registration requirements.

• Regulation of spot markets for crypto-assets are limited and not robust enough to ensure orderly and transparent trading, prevent conflicts of interest and market manipulation, and to protect investors and the economy more broadly; crypto-asset businesses do not have a consistent or comprehensive regulatory framework to address situations such as crypto-asset businesses that have affiliates or subsidiaries operating under different regulatory frameworks with no single regulator having a comprehensive view across the entire business; and, some crypto-asset trading platforms have proposed offering retail customers direct access to markets by vertically integrating the services provided by intermediaries which could expose them to riskier practices.

The report includes the following key recommendations:

• Enact legislation that provides rulemaking authority for federal financial regulators over the spot market for crypto-assets that are not securities.

• Enact legislation to address stablecoin risk; provide authority in legislation to regulators to have visibility into, and supervise, activities of affiliates and subsidiaries of crypto asset entities; and, provide “appropriate” service provider regulatory authority in legislation.

• study of potential vertical integration by crypto-asset firms.

(updated: 10-6-22)

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Digital Currency Analysis & Framework

The Biden Administration released (September 16) what appears to be a status report on its efforts to determine the future ‘way forward’ on the regulation and oversight of digital currency and other digital assets, rather than specific hard actions the Federal Government will take right now. 

So far, nine reports tied to the requirements of the Administration’s March EO have been submitted to the President by interagency groups. The Treasury Department released three of the reports, Justice released a report, and the Department of Commerce released a report.

Some specific actions outlined in the release could result in more concrete actions in the future, such as:

• Agencies “will encourage” the adoption of instant payment systems, like FedNow, by supporting the development and use of innovative technologies by payment providers to increase access to instant payments.

• Agencies will ”prioritize efforts” to align global payments practices, regulations, and supervision protocols, while also exploring platforms that integrate instant payment systems.

• The Treasury will “work with” financial institutions to bolster capacity to identify and mitigate cyber vulnerabilities through information sharing and analytical tools.

• The Treasury will “work with” other agencies to identify, track, and analyze emerging strategic risks that relate to digital asset markets.

• The White House Office of Science and Technology Policy (OSTP) and the National Science Foundation will develop a Digital Assets Research and Development Agenda.

• The Department of Commerce “will examine” establishing a standing forum to exchange knowledge and ideas that could inform future regulation, standards, coordinating activities, technical assistance, and research support.

• The Treasury will complete an illicit finance risk assessment on decentralized finance by the end of February 2023 and an assessment on non-fungible tokens by July 2023.

• In support of the Federal Reserve’s efforts on a Central Bank Digital Currency (CBDC), the Treasury will lead an interagency working group to consider the potential implications of a U.S. CBDC, leverage cross-government technical expertise, and share information with partners.

(updated: 9-16-22)

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Cryptocurrency Executive Order

The Biden Administration announced (March 9, 2022) that the President signed an Executive Order (EO) on “Ensuring Responsible Innovation in Digital Assets.” The EO tasks Federal agencies with analytical assignments intended to both better prepare future Federal policy and operations for the onset of digital currency, and potentially drive changes in policies, plans, and regulation down the road.

Assignments include:

• Treasury assessing and developing recommendations (within 180 days) addressing the implications of the growing digital asset sector and changes in financial markets for consumers, investors, businesses, and equitable economic growth.

• The Financial Stability Oversight Council (FSOC) identifying and mitigating systemic financial risks posed by digital assets and developing appropriate policy recommendations to address any regulatory gaps; FSOC produces a report (within 210 days) outlining specific financial stability risks and regulatory gaps and proposals for change.

• All relevant agencies examining national security risk posed by digital currency and coordinate actions on risk mitigation; Justice leads development of a report (within 180 days) on the role of law enforcement on criminal activity; all relevant agencies may submit classified or unclassified annexes to the National Strategy for Combatting Terrorism (within 90 days of the Strategy's publication) with additional views on illicit finance risks; Treasury leads development of a coordinated action plan for mitigating illicit finance and national security risk (within 120 days of the Strategy's publication); Justice leads development of a report (90 days) regarding how to strengthen international law enforcement cooperation on digital asset criminal activity.

• Commerce leading efforts across agencies to establish a framework to drive U.S. competitiveness and leadership in, and leveraging of, digital asset technologies; Commerce leads development of a report (within 180 days) establishing a framework for enhancing U.S. competitiveness.

• Treasury producing a report (within 180 days) on the future of money and payment systems, to include implications for economic growth, financial growth and inclusion, national security, and the extent to which technological innovation may influence the future.

• All relevant agencies take concrete steps to study and support technological advances in the responsible development, design, and implementation of digital asset systems while prioritizing privacy, security, combating illicit exploitation, and reducing negative climate impacts; WH/OSTP leads development of a report (within 180 days) on the impact of digital technologies to impede or advance efforts to tackle climate change.

• Agencies work with the Federal Reserve to explore a Central Bank Digital Currency (CBDC) by “placing urgency” on research and development and assessing technological infrastructure and capacity needs. WH/OSTP and WH/CTO produce a report (within 180 days) on a CBDC technical evaluation. The Federal Reserve is encouraged to continue research, development, and assessment efforts on a CBDC including development of a plan for broader U.S. Government action in support of their work.

• Treasury leading development of an "framework for interagency international engagement" (within 120 days) with foreign nations and international organizations on digital assets including "global principles and standards" and technology development "consistent with our values and legal requirements;" produce (within 1 year) a report on priority actions taken, including their effectiveness, under the framework. The Treasury delivered its framework to the President (July 7th).

(updated: 7-12-22)

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Federal Reserve Paper on Central Bank Digital Currency

The Federal Reserve announced (January 20, 2022) the release of a paper examining the pros and cons of a Central Bank Digital Currency (CBDC), presumably managed by the Federal Reserve.

(updated: 2-2-22)

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Cryptocurrency Reporting

The Infrastructure Investment and Jobs Act (P.L.117-58) included provisions (Section 80603) that require certain reporting of crypto currency transactions to ensure they are properly taxed. The Act digital assets to traditional annual IRS reporting requirements (Form 8300) -- i.e., transactions over $10,000. Failure to report such transactions could result in civil consequences and felony charges. The requirements are effective for transactions beginning January 1, 2023 and reported in annual reporting in 2024. The provisions are estimated to increase Federal tax revenue by $28 billion over ten years.

The provisions are somewhat controversial in that opponents believe that innovators within the crypto industry (e.g., currency developers and miners) are not adequately protected from tax rules not intended for them, though the U.S. Treasury Department has promised that any rules tied to tax requirements will work to exclude the innovation side of the industry. The timeline for Treasury guidance and/or rulemaking supporting the new law is not currently known publicaly.

(updated: 2-2-22)

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Recommendations on Stablecoins

A Presidential Working Group (PWG) on Financial Markets released a report and recommendations on stablecoins. Stablecoins are a type of digital asset that is collateralized and generally designed to maintain a stable value relative to the U.S. dollar. Other forms of collateral can include precious metals or commodities like oil, but most stick with dollar reserves. Tether and TrueUSD are popular crypto coins that have a value equivalent to that of a single U.S. dollar and are backed by dollar deposits.

The PWG recommends legislative action by the Congress to require:

• Stablecoin issuers to be insured depository institutions;

• Custodial wallet providers to be subject to appropriate federal oversight; and,

• Stablecoin issuers to comply with activities restrictions that limit affiliation with commercial entities. Federal supervisory authorities should have the ability to implement standards to promote interoperability among stablecoins.

PWG also says that in the absence of actions by Congress, the Financial Stability Oversight Council (Treasury) consider steps available to it within current authorities to address the risks outlined in the report.

(updated: 2-2-22)

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Cryptocurrency & Cyber Attacks

A group of Senators and Members of Congress sent a letter (October 8, 2021) to the Departments of Treasury, Justice, Homeland Security, and State requesting answers to a number of questions that concern how the Federal Government may be able to address crypto-utilized cyber crime within current authorities, or potential improved authorities in the future. 

(updated: 2-2-22)

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Cryptocurrency ETF Approval

The Security and Exchange Commission (SEC) approved (October 2021) the first cryptocurrency-linked Exchange Traded Fund (ETF) -- Proshares Bitcoin Futures ETF ($BITO). 

(updated: 2-2-22)

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