What we can learn about the future of digital assets regulation from recent US government reports

On 16 September the White House released the Comprehensive Framework for Responsible Development of Digital Assets, offering recommendations designed to protect consumers, advance sustainability efforts, and further national security. A response to President Biden’s March 2022 Executive Order (EO) on cryptocurrency, which called upon federal agencies to produce a total of 21 reports exploring the benefits and risks of digital assets, the framework intensifies activity across the US government on digital assets policy.

Just last week, three reports were released by the US Department of the Treasury in response to the EO and a pair of hearings in the Senate probed crucial elements of web3 policy and regulation. This recent redoubling comes on the heels of a busy congressional session in which several bipartisan bills were introduced to bring clarity to the quickly scaling sector. Importantly, policy activity in the US also has implications for other jurisdictions.

The US Department of the Treasury (Treasury) sees crypto’s potential risks, including disclosure gaps and user confusion, as a challenge to continued innovation and adoption; as Treasury Secretary Yellen stated, “The reports clearly identify the real challenges and risks from digital assets used for financial services […] if these risks are mitigated, digital assets and other emerging technologies could offer significant opportunities.” And these opportunities come in many forms, including potentially reducing the high cost of payments, estimated to be $15B annually, and better reaching the roughly 7 million unbanked adults in the United States.

To mitigate risks, the Crypto Assets report from Treasury calls upon agencies to monitor the sector for unlawful activity, pursue investigations and issue supervisory guidance. Further recommendations include enhancing education for US consumers, investors and businesses to provide access to trustworthy information on crypto-assets and developing mitigation strategies to prevent money laundering and terrorism financing. The Department of Justice also announced the launch of a Digital Asset Coordinator Network to combat the illicit use of crypto. This network of 150 federal prosecutors around the nation will focus their efforts on investigating and prosecuting crypto crimes.

Recognizing the need for greater regulatory clarity, Treasury recommends that regulators issue new rules and guidance to provide regulatory clarity to crypto firms. This recommendation is timely, as just last week, two Senate hearings examined critical open questions of crypto policy.

At its annual oversight hearing before the Senate Banking Committee on 15 September, SEC Chairman Gensler was pressed by ranking member Senator Toomey to explain SEC rules for determining whether a token is a security or a commodity in addition to the process for crypto intermediaries to register with the commission.

The hearing invigorated a longstanding critique that the SEC has opted to take a reactive, enforcement position as opposed to a proactive guidance posture. In another hearing with the Senate Agriculture Committee, policy-makers discussed the recently proposed Digital Commodities Consumer Protection Act and debated questions of jurisdictional authority.

While the reports neither provide clarity on the legal status of crypto assets nor delineate clear regulatory swim-lanes, the 21 reports articulate the need for gap filling, amplifying the call for congressional action.

This call dovetails with efforts in the European Union (EU) to develop the Markets in Crypto Assets (MiCA) regulation, which will create rules and guidance for EU member states on crypto assets. As the US and EU move toward developing approaches to crypto regulation, further international collaboration will be key to addressing the global, decentralized nature of web3.

With increasing research and development, there is continued impetus for the US to pursue a Central Bank Digital Currency (CBDC). As of July 2022, nearly 100 CBDCs are in the exploration stages, including two fully launched digital currencies.

The reports reissued the call for exploring the development of a digital dollar, noting that further research is required to determine whether a CBDC would improve the current payments system. The White House Office of Science Technology and Policy (OSTP) published a report assessing the technical aspects of a digital dollar, while the Department of Commerce report addressed competitiveness. These considerations have been front and centre in other jurisdictions, such as Australia, where a Senator recently proposed a set of disclosure requirements on China’s central bank digital currency.

In the US, the final determination of whether to move forward with a CBDC will come from several parties, including the Federal Reserve, the White House and Congress. Treasury will lead the inter-agency effort that will provide the basis for deciding. The World Economic Forum continues to closely follow the development of CBDC closely and will proceed with further exploration of the topic in upcoming research and discussions.

The reports are the product of many months of effort across the government, from Treasury to the OSTP. Still, they call for an enhanced coordinated effort to realise the benefits and mitigate the risks of digital assets.

This collaboration must extend beyond government, engaging the private sector too in developing fit-for-purpose policies and regulations. As National Economic Council Director Deese and National Security Advisor Sullivan noted in a joint-statement, "Together, we are laying the groundwork for a thoughtful, comprehensive approach to mitigating digital assets' acute risks and – where proven – harnessing their benefits. We remain committed to working with allies, partners, and the broader digital asset community to shape the future of this ecosystem.”

The reports share a predominant focus on the financial-use cases of web3 technology. While areas of the ecosystem (like Decentralized Finance) have historically drawn the most attention of policy-makers, broader applications of blockchain, digital assets, and associated technologies may realize greater equity, reduce censorship, and advance sustainability efforts. The lack of focus on web3’s wider promise creates an opportunity for further engagement to ensure that digital assets policy is developed to realize the full potential of these technologies.

Perhaps the most notable exception to this trend is the focus on the environmental effects of crypto. In the EU, policy-makers have long debated measures to curtail the negative impacts of crypto on the environment. In the US, while crypto's energy usage has historically been a focus for policy-makers, some experts are beginning to see its potential to help tackle perennial environmental challenges.

In a recent report published by the OSTP, the organization explored both the effect of crypto on electricity usage and the grid and the potential for web3 technologies to support climate risk mitigation. The discourse on crypto's environmental impact has redoubled in recent weeks with the much-anticipated upgrade of Ethereum to a Proof-of-Stake consensus mechanism.

This year the US has witnessed significant activity on digital assets policy across each branch of the Federal Government. Recent agency efforts underscore the increasing importance of web3 technology to the White House. While several reports from the Biden EO provides insight into the benefits and risks of crypto, they leave key questions unanswered. Likewise, other jurisdictions continue to grapple with fundamental issues of digital assets policy.

Continued collaboration across the public and private sectors will be required to achieve the Biden administration’s policy objectives of protecting consumers, building safe, secure, and accessible financial systems, and promoting responsible innovation. This is especially important if the US wishes to lead this innovation through a design consistent with democratic values, privacy, and human rights.