In March, the Biden White House issued an Executive Order requiring federal agencies to examine the risks and benefits of crypto-assets. Nine(!) reports have been tabled since that order, and in that time the various agencies involved have dutifully prepared reports on crypto-assets, CBDCs and digital currencies, leading to the White House to recently announce a "comprehensive framework for responsible development of a digital assets". How much of a framework emerges from the reams of reports published? We explore this below.
The reports include:
This report was published by the Department of the Treasury and focuses on on anti-money laundering and illicit finance regulations as they apply to digital currency and crypto. The action plan "identifies priority and supporting actions to support this commitment in line with the priorities and supporting actions identified in the Illicit Financing Strategy specific to uncovering and mitigating the misuse of digital assets by illicit actors." It is worth noting that the Chainalysis Crypto Crime report has shown how little relative illicit use there is of crypto, while the headline figure of illicit use increases as greater transaction flow enters the space.
This report was published by the Department of the Treasury. This report focuses on government recommendations on consumer protection, including calls for greater access to information about the risks of investing in digital assets. There is also a great emphasis on the efforts of the European Union in the development of the Markets in Crypto Assets regulations (MiCA), which will create rules and guidance for EU member states on crypto assets. Could MiCA provide the framework the US is looking to build?
The Department of the Treasury looked at the interaction between crypto, payments and the US economy. Central Bank Digital Currencies are also considered in the report, following on from the White House Office of Science and Technology Policy's report published earlier this year. The report provided several recommendations that focus on a more holistic approach to reshaping the US payments system, noting potential regulatory and technological changes and it represents the most forward looking of the reports.
The most anticipated of the reports, from the White House Office of Science and Technology Policy noted the size of the US crypto mining ecosystem, and attracted polarising commentary from critics, including assertions that it is not about climate but about control of Bitcoin. The report calls for long-term restrictions on proof-of-work mining - the primary form of mining that bitcoin uses - including by Executive Order, due to asserted excessive energy use and costs.
Continuing with an environmentally friendly ethos, the report also suggested that certain forms of energy generation may create overall climate benefits such as those that 'capture vented methane to produce electricity' which 'can yield positive results for the climate, by converting the potent methane to CO2 during combustion.
This report from the White House Office of Science and Technology Policy provided a series of objectives and policy goals for a potential CBDC issued by the US Treasury. At the time of writing, the Federal Reserve is conducting research and is inviting submissions into this area. This will move far slower than Australia's RBA CBDC pilot or any of the other CBDC pilots operating around the world, but will be closely watched as the US is such a significant financial market.
This report, also from the White House Office of Science and Technology Policy expands upon the Policy Objectives for a US CBDC report above, and focused on the technological aspects of a potential digital dollar. The report recommended the support of the Federal Reserve's work by involving the National Science Foundation, as well as improving the overall technological infrastructure of the US Government. Given how much antiquated technology exists in the US (where cheques are still somehow a thing).
The DOJ's report provided an overview of the Department's work around its enforcement with respect to cryptocurrency matters to date. In addition, it contains a series of recommendations "on how to further strengthen [the DOJ's] ability to detect, investigate, prosecute, and otherwise disrupt criminal activity." This approach naturally focuses on prosecutions and in the current US climate of "regulation by enforcement" is consistent with that narrative.
This report seeks to lay a path forward to achieve regulatory and technological leadership in the digital asset market for the US. The report was organised around four categories, and if these were all adopted, the Department of Commerce believes that could advance the competitiveness of the US-based digital asset industry. The four areas area:
Ensuring effective regulatory approaches and addressing regulatory gaps
International engagement and trade promotion
Meaningful public-private engagement
Sustained US leadership in R&D
Of the four, the first is the most interest to many lawyers in the space, and many projects struggling to understand where the lines of enforcement will fall. Unfortunately the Department of Commerce misses an opportunity to advocate for better understanding of the technology and disruption Blockchain offers, and provides only a high level comment on how "[c]ontinued and regular enforcement of applicable financial laws and regulations is a foundational principle of U.S. competitiveness in financial services, including digital assets", without any comment on the number of projects which leave or avoid the US because of the unclear application of those foundational principles to a technology which does not neatly align with existing laws.
A further comment that "financial regulation and supervision must be equally applied to digital assets and their related products and services compared to similar traditional assets, products, and services" shows that Commerce is firmly within a traditional viewpoint and has yet to understand how digital assets truly function.
What does it all add up to?
While the White House has promoted this as a "digital asset framework", on close examination of the reports, there is many laudable phrases about the need for regulation, and balancing consumer protection with innovation but overall there is a greater emphasis on the risks and dangers of digital currency instead on examination of ways to harness the benefits of this innovative technology.
Despite this, the reports comprise perhaps the start of a discussion which might lead to a framework in time, and will have triggered education and learning within the various government agencies and departments, which remains an important first step so that later actions can be based on informed understanding and, hopefully, not fear of change and disruption. While this may be frustrating to those who wish for leadership by the US and a more embracing approach to digital currency, it is a feature, not a bug, of the legal reform process.
The writer recalls the inspiration brought by JFK's Moon Speech in 1962 and can only wonder just how far the US could go in research, development and bringing in a technological blockchain revolution with even greater impacts than the space race, if it chose to do those things, not because they are easy, but because they are hard.
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