This Week in Policy (9/18)

This Week in Policy (9/18)

Hello Fintech-enthusiasts!

Last week was very busy in crypto land, not only because of the Merge, which ushers a new era for the world’s second-largest cryptocurrency, but also because the Biden administration finally revealed significant aspects of its comprehensive approach to digital assets.

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Last Friday, the Biden administration released seven new reports, all of which are required under President Biden’s March 9th executive order. The new reports came one week after the report on the environmental impact of blockchain consensus mechanisms, which we covered last week. A ninth report on the gaps in the regulation of digital assets is still in the making and is expected next month. Among the seven reports that were released on Friday, the most prominent were the three reports of the Treasury Department, the report of the Department of Justice (DOJ), and the report of the Office of Science and Technology Policy (OSTP).

The long-awaited Treasury reports sought to identify “the real challenges and risks of digital assets used for financial services,” according to a statement from Secretary Janet L. Yellen. So, what are the highlights of the reports? For starters, the reports took no position on the primary question in U.S. crypto policy, which is the distinction between digital assets that are securities and those that are commodities. The reports rather adopted a fine-line approach: insisting that “U.S. regulatory and law enforcement authorities should aggressively pursue investigations and enforcement actions,” on the one hand, and calling for “enhanced use of supervisory guidance,” on the other hand. What about a U.S. Central Bank Digital Currency (CBDC)? The reports urged the Federal Reserve to “continue its research and technical experimentation on CBDCs,” while cautioning that “[a]dvance work on a possible U.S. CBDC” should only take place “in case one is determined to be in the national interest.” Should nonbanks be allowed to be part of the financial system? The reports indicated that “[n]onbanks are increasingly providing payment services,” which “may contribute to higher levels of competition, inclusion, and innovation.” But the reports also emphasized that “if these firms are not adequately regulated and supervised, there may be risks to consumers, the financial system, and the broader economy.” But what should such regulation and supervision look like? No word on this.

The DOJ report focused on the criminal exploitation of digital assets, especially nonfungible tokens, and novel financial activities, mainly decentralized finance. It made three main recommendations to improve law enforcement efforts in these areas: (1) extending anti-tip-off laws to virtual asset service providers (meaning that virtual asset service providers would be prohibited from alerting suspects of money laundering about ongoing investigations), (2) strengthening the criminal sanctions of unlicensed money transmitting businesses, and (3) extending the statute of limitation for digital-asset offenses to account for the complexity of investigations. The report also mentioned that the DOJ will launch a "Digital Asset Coordinator Network," which would comprise a group of 150 federal prosecutors nationwide who would specialize in crypto crimes.

The OSTP report was the most technical. It considered 18 possible choices for the design of a U.S. CBDC, which were divided into six categories: Participants, Governance, Security, Transactions, Data, and Adjustments. The report highlighted the technical complexities that would arise if the Federal Reserve were to run a permissionless system (i.e., a system that is basically open to everyone) and, thus, based its analysis on the assumption that a permissioned CBDC system would exist.

Beyond addressing the technicalities of law enforcement and the design choices of CBDC, why do you think the reports were so careful to not adopt any clear position on the big crypto policy questions? What are the main implications of this executive ambiguity for any future crypto regulation Congress may adopt in the future?

Next week, we will discuss a recent manifestation of the regulatory competition between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission. We will also talk about how the SEC weighed in on the Merge. Stay tuned!

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See you next week!