Kate Henry

Following the Biden administration’s call to action to federal regulators in a March 9 executive order, the Treasury Department, Federal Reserve and other regulators have issued reports highlighting the risks to the economy and consumers associated with crypto assets, including cryptocurrencies, and have proposed potential solutions and safeguard to address those risks. The White House issued a fact sheet on Sept. 16 setting forth a streamlined summary of these efforts.  

In the executive order, President Joe Biden called for a holistic approach from regulators to tackle the complex and rapidly evolving universe of crypto-assets and digital technology, creating “the first whole-of-government approach to addressing the risks and harnessing the potential benefits of digital assets and their underlying technology.” To accomplish this goal, the executive order set forth six areas of focus for the agencies: consumer and investor protection, promotion of financial stability, counteracting illicit finance, U.S. leadership in the global financial system and economic competitiveness, financial inclusion and responsible innovation.  

As of the date of the fact sheet, nine reports had been issued by financial regulators, which provide a comprehensive landscape of potential risks and economic pain points associated with digital assets, and a roadmap of approaches to mitigate the risks while still encouraging innovation within the digital asset space. Several of the substantive areas of focus in the Fact Sheet are highlighted below. 

Michael Krebs

Protecting Consumers, Investors and Businesses 

Financial regulators of digital assets are most concerned with the inherent risk of new digital currencies to consumers, investors and businesses. Lack of certainty with respect to valuation, extreme volatility in value and pricing and the potential for fraud in a newly-burgeoning market create necessity for regulation and oversight to ensure that consumers and businesses are able to take advantage of the innovative advantages of digital currencies safely and with a degree of dependability. 

Based on data, research and reports received from the financial regulators, the Biden administration has set forth some additional actions to be taken by the government to ensure the advancement of consumer and business protection with respect to digital assets.  

Agencies with enforcement capabilities, such as the SEC and the Commodity Futures Trading Commission, are encouraged to “aggressively pursue” investigations into and penalties for unlawful practices with respect to digital assets and cryptocurrencies. For instance, the SEC recently reached a $1.26 million settlement with reality television star Kim Kardashian in connection with her failure to disclose payments she received in exchange for marketing a crypto asset security via her social media platform.  

Monitoring agencies, such as the Consumer Financial Protection Bureau and the Federal Trade Commission, are to more closely monitor consumer complaints regarding digital assets to watch for indications of unfair, deceptive and abusive practices. The U.S. Treasury’s Office of Foreign Assets Control and Financial Crimes Enforcement Network have recently focused efforts on these objectives, announcing two settlements totaling over $24 million and $29 million, respectively, with Bittrex Inc., a virtual currency exchange, representing OFAC’s largest virtual currency action to date.   

Promoting Access, Stability and Innovation  

One of the other potential upsides of the proliferation of digital assets is the relative ease with which traditionally unbanked or underbanked communities might be able to participate in and engage with the economy and the banking system.  

In addition to touting the potential upside of introducing programs such as FedNow, the Federal Reserve’s interbank clearing system that would create an infrastructure for instant payments in conjunction with The Clearing House, the fact sheet proposed additional action items for financial regulators in the coming months. For instance, agencies are encouraged to adopt additional programs similar to FedNow that would promote the development of innovative tools to increase access to the banking system for traditionally underserved communities. The executive branch is also considering further agency recommendations to create a federal blueprint for nonbank payment mechanisms, which will increase access and ensure stability for such systems. 

One of the chief concerns surrounding the emergence of digital assets is the inherent lack of transparency and volatility with respect to value.  

The fact sheet highlights the importance of creating a regulatory environment that would create greater predictability for participants within the system. One measure proposed by the Biden administration is for the Treasury to work with financial institutions to improve their internal frameworks to identify, counteract and mitigate cyber vulnerabilities that are inherent in the digital asset space.  

The fact sheet also emphasizes the great potential of digital assets, particularly through private-sector companies, but encourages measures to ensure that such innovation is pursued within responsible parameters of regulation and oversight that will allow innovative measures to proliferate without creating additional risks to the economy or consumers. To that end, the fact sheet calls on the Office of Science and Technology Policy to develop a digital assets research and development agenda to focus research efforts on topics germane to the digital asset space, and to provide support to social sciences and education research that focuses on increased efforts to inform, educate and train diverse stakeholders. 

Kate Henry and Michael Krebs are an associate and partner, respectively, in Nutter’s corporate and transactions department. Both are members of the firm’s banking and financial services group.