The Biden Administration’s Digital Assets Executive Order and Its Implications

March 10, 2022

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On March 9, 2022, President Biden signed a long-awaited Executive Order (titled “Ensuring Responsible Development of Digital Assets” and issued with an accompanying Fact Sheet) regarding the U.S. government’s strategy for digital assets, defined to include cryptocurrencies and other forms of exchange that are recorded on the blockchain.[1]  Citing the need for the federal government to address the role of digital assets in the financial system, the Executive Order represents the first whole-of-government approach to the benefits and risks of digital assets.  It is a general policy statement that reflects the views of the administration, as opposed to a specific proposal for regulation.

In our view, there are three principal takeaways from the Executive Order.  First, it acknowledges the exponential growth and opportunity that the digital asset ecosystem presents, and outlines a policy interest in “responsible financial innovation” and the need for evolution and coordination to ensure that the United States continues to be a leader in the space.  Second, the Executive Order identifies a number of perceived general risk areas that digital assets can pose on issues ranging from consumer protection to national security to the environment.  Third, to address these risks, the Executive Order tasks various federal agencies—working in coordination—to draft a host of reports, frameworks, and action plans to evaluate the various perceived challenges and opportunities presented by digital assets.  We discuss each takeaway in order below.

U.S. Commitment to Digital Asset Leadership

To date, countries around the world have taken divergent stances on digital assets. Cryptocurrency transactions are banned in China, for instance, whereas other jurisdictions have gone as far as to make bitcoin legal tender.[2]  It was not clear where the White House would come down on this spectrum, as individual U.S. lawmakers, regulators, and enforcers have offered differing views on how to approach digital assets.

The Executive Order offers a strong endorsement of the potential of digital assets and the need for the United States to play a leading role in shaping the design of this ecosystem.  Specifically, it declares that “[w]e must reinforce United States leadership in the global financial system and in technological and economic competitiveness, including through the responsible development of payment innovations and digital assets.”[3]  Further, it provides that the U.S. has an interest in remaining at the “forefront” of the “responsible development and design of digital assets,” where its leadership can “sustain United States financial power and promote United States economic interests.”[4]  One potential way to do so is by creating a central bank digital currency (“CBDC”), which, as discussed below, the Executive Order tasks various parts of the government to study at length.

The Executive Order also recognizes the benefits that digital assets can provide to consumers, as they may help expand equitable access to financial services by, for instance, “making investments and domestic and cross-border funds transfers and payments cheaper, faster, and safer.”[5]

At the same time, the Executive Order acknowledges that many opportunities and challenges posed by blockchain-based ecosystems fall outside the scope of existing laws and that government approaches to date have been “inconsistent,” “necessitating an necessitate an evolution and alignment of the United States Government approach to digital assets.”[6]

Potential Risks in the Digital Asset Ecosystem

The Executive Order identifies a number of broad potential risk areas involving digital assets that may implicate a wide range of participants in the ecosystem including exchanges, custody providers, investors, token issuers, and companies that accept digital assets for payment.  Specific risks cited in the Executive Order include:

• Data Protection—Without “sufficient oversight and standards,” firms providing digital asset services “may provide inadequate protections for sensitive financial data, custodial and other arrangements relating to customer assets and funds.”[7]
• Privacy—Key “safeguards” identified in “responsible development” of digital assets include “maintain[ing] privacy” and “shield[ing] against arbitrary or unlawful surveillance.”[8]
• Risk Disclosures—An important facet of protecting investors is ensuring adequate “disclosures of risks associated with investment.”[9]
• Cybersecurity—Cybersecurity issues that have occurred at major digital asset exchanges and trading platforms to date have contributed to billions of dollars of losses.[10]
• Systemic Risk—In order to mitigate systemic risk, digital asset issuers, exchanges and trading platforms, and other intermediaries “should, as appropriate, be subject to and in compliance with regulatory and supervisory standards that govern traditional market infrastructures and financial firms.”[11] Moreover, new and unique uses of digital assets “may create additional economic and financial risks” that require “an evolution to a regulatory approach.”[12]
• National Security and Illicit Finance—Noting that digital assets can pose significant national security and illicit finance risks ranging from terrorism financing to cybercrime, the Executive Order aims to “ensure appropriate controls and accountability” for digital asset systems to “promote high standards for transparency, privacy, and security” in order to counter these activities.[13]
• Sanctions Evasion­—Digital assets may be used to circumvent sanctions.[14]
• Climate and Pollution—The United States also has an interest in reducing “negative climate impacts and environmental pollution” from “some cryptocurrency mining.”[15]

In light of some of these risks, President Biden’s Executive Order provides that the United States “must support technological advances that promote responsible development and use of digital assets,” including by ensuring that digital asset technologies “are developed, designed, and implemented in a responsible manner” that includes privacy and security, features and controls to defend against illicit exploitation, and efforts to reduce negative environmental impacts.[16]

Researching the Path Forward

To determine the next steps for the U.S. government in the digital asset space, the Executive Order establishes an interagency process to address many of the opportunities and challenges outlined above.[17]  Further, it calls for a number of reports, frameworks, action plans, and more to be developed, as outlined in the table below.

Critically, the Executive Order does not itself implement any new regulations over the digital asset space or require that agency reviews adopt particular rules or requirements.  Instead, it just identifies what homework needs to be done.  Accordingly, the Executive Order has not changed the jurisdiction of any U.S. regulator or enforcer with respect to digital assets, nor does it call for Congress to act to expand the jurisdiction or authority of independent agencies such as the CFTC or SEC, even as it opens by acknowledging that the novel challenges and opportunities presented by digital assets may not be within the scope of existing federal laws.[18]  Various federal agencies are therefore instructed to “consider” whether some of the digital asset risks that are identified—such as privacy, consumer protection, and investor protection—are within the jurisdiction of existing regulators or “whether additional measures may be needed.”[19]  The agencies’ conclusions to those questions, of course, will be of great interest to all market participants and those interested in digital assets and blockchain technology, including potentially to members of Congress.

Notably absent from the Executive Order is any reference to regulations implementing the tax information reporting provisions of HR 3684, the Infrastructure Investment and Jobs Act, signed into law on November 15, 2021.  As discussed in this Gibson Dunn Client Alert, those provisions are one of the few recent legislative measures addressing digital assets and include effective dates that contemplate reporting requirements on a broad range of digital asset transactions beginning in January of 2023.

Conclusion

The Executive Order is both a landmark and a question mark for U.S. digital asset policy.  It boldly proclaims that the United States intends to lead in promoting the responsible development and design of digital assets, even as it details in broad strokes many of the risks that the digital asset ecosystem could pose to consumers, investors, and citizens.  But it does not address how these risks will be addressed in concrete terms, nor does it speak to the unique privacy, consumer and cybersecurity values and opportunities that are furthered by the technological innovation of the blockchain.  As a result, continued uncertainty remains in the digital asset space with respect to, among other things, a clear regulatory framework, with regulation by enforcement continuing to be significant, even on certain fundamental questions.  In the coming months, Gibson Dunn will be closely monitoring additional developments and the research outputs required by the Executive Order in order to help its clients across the digital asset space navigate regulatory risks and requirements in the United States.

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[1]   Many of the top administration officials and heads of agencies announced their support for the Executive Order, including Treasury Secretary Yellen, Consumer Financial Protection Bureau (“CFPB”) Chairman Chopra, Commerce Secretary Raimondo, National Security Advisor Sullivan and National Economic Council Director Deese, Commodity Futures Trading Commission (“CFTC”) Chairman Behnam, and a tweet from Securities and Exchange Commission (“SEC”) Chair Gensler.  The White House also convened a background call with senior administration officials to discuss the Executive Order.

[2]   See, e.g., Alun John, Samuel Shen and Tom Wilson, China’s top regulators ban crypto trading and mining, sending bitcoin tumbling, Reuters (Sept. 24, 2021), https://www.reuters.com/world/china/china-central-bank-vows-crackdown-cryptocurrency-trading-2021-09-24/; Aaryamann Shrivastava, Swiss City To Make Bitcoin a Legal Tender After Mexico and El Salvador, FX Empire (Mar. 4, 2022), https://www.fxempire.com/news/article/swiss-city-to-make-bitcoin-a-legal-tender-after-mexico-and-el-salvador-922943.

[3]   Executive Order, § 2(d).

[4]   Executive Order, § 2(d).

[5]   Executive Order, § 2(e).

[6]   Executive Order, § 2(a).

[7]   Executive Order, § 2(a).

[8]   Executive Order, § 2(a).

[9]   Executive Order, § 2(a).

[10]   Executive Order, § 2(b).

[11]   Executive Order, § 2(b).

[12]   Executive Order, § 2(c).

[13]   Executive Order, § 2(c).

[14]   Executive Order, § 2(f).

[15]   Executive Order, § 2(f).

[16]   Executive Order, § 3.

[17]   Executive Order, § 5(b)(v); see also Executive Order, § 4(b).

[18]   Executive Order, § 8(b)(iv).

[19]   Executive Order, §§ 8(b)(i); 8(b)(ii).

[20]   Executive Order, § 5(b)(iii).

[21]   Executive Order, § 4(b).

[22]   Executive Order, § 5(b)(i).

[23]   Executive Order, §§ 5(b)(vii); 5(b)(viii).

[24]   Executive Order, § 8(b)(iii).

[25]   Executive Order, § 6(b).

[26]   The FSOC comprises 10 voting members (the heads of Treasury, the Federal Reserve, OCC, CFPB, SEC, FDIC, CFTC, FHFA, NCUA, and a Senate-confirmed member with insurance expertise) and five nonvoting members (Office of Financial Research, Federal Insurance Office, a state insurance commissioner, a state banking supervisor, and a state securities commissioner).  See About FSOC, U.S. Department of Treasury, https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/fsoc/about-fsoc.

[27]   Executive Order, § 7(c).

[28]   Executive Order, § 4(d)(i).

[29]   Executive Order, § 5(b)(ii).

[30]  Executive Order, § 4(d)(ii).

[31]  Executive Order, § 4(c).

[32]  Executive Order, § 7(b).

[33]  Executive Order, § 5(b)(iv).

[34]  Executive Order, § 5(b)(v).

[35]   Executive Order, § 5(b)(vi)

Gibson Dunn stands ready to help guide industry players through the most complex challenges that lay at the intersection of regulation, public policy, and technical innovation of blockchain and cryptocurrency.  If you wish to discuss any of the matters set out above, please contact Gibson Dunn’s Crypto Taskforce ([email protected]), or any member of its Financial Institutions, Global Financial Regulatory, Public Policy, Administrative Law and Regulatory, Privacy, Cybersecurity and Data Innovation, Tax Controversy and Litigation, or White Collar Defense and Investigations teams.

Ashlie Beringer – Co-Chair, Privacy, Cybersecurity & Data Innovation Group, Palo Alto (+1 650-849-5327, [email protected])

Matthew L. Biben – Co-Chair, Financial Institutions Group, New York (+1 212-351-6300, [email protected])

Michael D. Bopp – Co-Chair, Public Policy Group, Washington, D.C. (+1 202-955-8256, [email protected])

Stephanie L. Brooker – Co-Chair, White Collar Defense & Investigations Group, Washington, D.C.
(+1 202-887-3502, [email protected])

M. Kendall Day – Co-Chair, Financial Institutions Group, Washington, D.C. (+1 202-955-8220, [email protected])

Michael J. Desmond – Co-Chair, Global Tax Controversy & Litigation Group, Los Angeles/ Washington, D.C. (+1 213-229-7531, [email protected])

Roscoe Jones, Jr. – Co-Chair, Public Policy Group, Washington, D.C.
(+1 202-887-3530, [email protected])

Thomas J. Kim – Partner, Securities Regulation and Corporate Governance Practice Group, Washington, D.C. (+1 202-887-3550, [email protected])

Arthur S. Long – Partner, Financial Institutions and Securities Regulation Practice Groups, New York (+1 212-351-2426, [email protected])

Eugene Scalia – Co-Chair, Administrative Law and Regulatory Group, Washington, D.C. (+1 202-955-8543, [email protected])

Jeffrey L. Steiner – Co-Chair, Global Financial Regulatory Group, Washington, D.C. (+1 202-887-3632, [email protected])

Helgi C. Walker – Co-Chair, Global Litigation Group, Washington, D.C. (+1 202-887-3599, [email protected])

Chris Jones – Senior Associate, White Collar Defense & Investigations Group, San Francisco (+1 415-393-8320, [email protected])

Associate Allison Ortega also contributed to this client alert.

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