Last week on 8 March 2022, President Joe Biden issued an Executive Order on Ensuring Responsible Development of Digital Assets. The Order outlines the United States’ (US) first ever, whole-of-government strategy to address the risks, and harness the potential benefits, of digital assets and their underlying technology.
We encourage the financial services industry generally, as well as regulators and agents at relevant Government departments to read the Order and this alert.
What does the Order say?
The Order sets out a national policy for digital assets, and calls for measures, across the following six key priorities:
- Consumer and investor protection: Directs the Department of the Treasury (Treasury) to partner with other US agencies to assess and develop policy recommendations to address the impacts of changes in the financial markets and growing digital asset sector for consumers, investors and businesses. Encourages US regulators to oversee and safeguard any systemic financial risks arising from digital assets.
- Financial stability: Encourages the development of policy recommendations to address regulatory gaps in relation to systemic financial risks arising from digital assets.
- Illicit finance: Directs coordination action across all relevant US agencies to mitigate illicit finance and national security risks arising from illicit use of digital assets, including working with allied countries and partners internationally for an aligned response to risks.
- US leadership in the global financial system and economic competitiveness: Directs a whole-of-government approach to establish a framework to drive US competitiveness, leadership in and the leveraging of digital asset technologies, and then prioritise the framework in agency approaches to digital asset policy and operations.
- Financial inclusion: Envisages Treasury partnering with relevant US agencies to produce a report on the future of money and payment systems, and the implications for economic growth, financial growth and inclusion, national security, and the extent to which technological innovation may influence that future.
- Responsible innovation: Directs the US government to take concrete steps to study and support technological advances in the responsible development, design, and implementation of digital asset systems while prioritising privacy, security, combating illicit exploitation, and reducing negative climate impacts.
Another key aspect of the Order is that it places urgency on research and development of a US Central Bank Digital Currency (CBDC), should it be deemed in the national interest. The Order directs the US government to assess the technological infrastructure and capacity needs for a US CBDC in a manner that protect Americans’ interests. Also, the Order encourages to the Federal Reserve to continue its efforts for a US CBDC and develop plans for broader US governmental action to support their work so the US can participate in experiments with other countries and promote its leadership internationally on CBDC development.
Our view
The Order marks a turning point towards a more coherent US federal response to the digital asset industry, including cryptocurrencies. The proposed approach in prioritising the research and development of policies to address risks and benefits of digital assets should prompt other states, including New Zealand, to do the same. This is particularly important given questions raised by digital assets have cross-border aspects and implications and the US has signalled they intend to reach out and work with international partners to promote robust standards and a level playing field.
It is significant that the US Executive has formally acknowledged the rapid growth of and potential benefits of adopting digital assets into the mainstream financial system. Players in the crypto industry can expect to see more engagement, action from regulators on gaps in the law, and clarity in the coming months and years, and can move to take full advantage of the opportunities.
The timing of the Order is also pertinent as governments globally come to terms with the role of digital assets in geopolitical conflict in the context of the imposition of sanctions against Russia. In New Zealand, the Russia Sanctions Act 2022 even goes as far as to identify cryptocurrencies as a type of asset, and a service relating to cryptocurrency as a type of service, which the Governor General can designate to be targeted by sanctions. For further information about New Zealand’s sanctions regime against Russia see here and for its implications on financial institutions see here. In particular, the Order outlines the US’ desire to reinforce leadership in the global financial system and safeguard national security tools like sanctions and anti-money laundering frameworks. Readers should monitor developments in this area as they will undoubtedly affect business going forward (especially with US businesses, citizens, or accounts).
The direction to the Federal Reserve in relation to a CBDC also resonates in the context of our own Reserve Bank of New Zealand’s announcement that it has commenced design work on an NZ CBDC. See our February alert here. As we wrote, it goes without saying that the prospect of a CBDC is exciting and has the potential to change how we all interact with money and the broader financial system. A CBDC has the potential to increase financial inclusion and provide users with a convenient, fast and efficient way to use money.
Finally, as our Finance & Expenditure Select Committee ponders the extensive submissions it has recently received in relation to its enquiry into cryptocurrencies* and considers how to frame its report to Parliament, the calls to action of our international friends (including Australia in its October 2021 report here, and now the US) can help lay the groundwork for New Zealand’s regulatory response in this increasingly important area.
*Disclosure: Jeremy Muir, Partner, is an appointed external adviser to the Committee in relation to the enquiry.
What next?
If you have questions in relation to this article, business in digital assets, or are considering how these updates may affect your business, please contact one of our experts.
We have an abundance of experience in this space, so you’re in good hands.
This article was co-authored by Shaanil Senarath-Dassanayake, a Solicitor in our Financial Services team.
