Joseph Stafford is a partner in the law firm Wilson Elser and provides advice to clients in the areas of practice of Intellectual Property, Regulatory Compliance and Corporate Risk Management / D&O.
In signing an executive order (EO) on cryptocurrencies, President Biden signaled an openness to the potentially positive impacts of technology. This is a significant and encouraging development for an asset class (digital assets) that has recently surpassed $ 3 trillion in market capitalization. If there has ever been any fear of widespread or US-led international crackdown on Bitcoin, it seems to have disappeared and the United States seems to have indicated its intention to be an international leader in the area. That said, it would be naive to suggest that the EO will lead to relaxed legal or regulatory scrutiny.
By overlapping the EO with recent legal and regulatory developments, we can better understand what to expect after the EO from March 9, 2022.
Reasons for protected optimism
For quite some time, government opinion on Bitcoin has focused on illicit activities such as ransomware, the avoidance of sanctions, and terrorist financing. Although the EO suggests that the government is now also considering the potentially positive impact of technology, it still explicitly cites consumer protection and illicit financing as top priorities. In this sense, it is worth noting several points.
First, the EO repeatedly emphasizes consumer protection and calls for an “unprecedented focus on coordinated action” to mitigate the risks of illicit financing and national security posed by cryptocurrencies. This approach becomes much more interesting when viewed in conjunction with recent regulatory activity.
For example, we took weeks away from a report released by the U.S. Treasury Department on March 1, 2022, which stated that one of the most significant illicit financial threats to the United States is the “increased digitization” of payments and financial services. This report called on industry participants, and in particular “virtual asset service providers,” to remain diligent in their obligations under the Bank Secrecy Act and related regulations. (Ironically, Treasury Secretary Janet Yellen issued a statement on the EO before it was actually released. The statement, which has since been removed, indicated a perhaps overly enthusiastic desire by the Treasury to work with other agencies to ensure that the focus is not only on promoting a more efficient financial system, but also on illicit financing and risks to its stability).
In addition, we are three months removed from February 17, 2022, the appointment of Eun Young Choi as the first director of the newly formed National Cryptocurrency Enforcement Team (NCET). NCET was formed by the U.S. Department of Justice (DOJ) to serve as a cryptocurrency-specific enforcement team tasked with investigating and processing complex cases involving the misuse of cryptocurrencies. In addition, NCET’s announcement was accompanied by news of the FBI’s new Virtual Asset Exploitation Unit, which will work with NCET and provide technical assistance and training related to blockchain analysis and asset seizures. Thus, EO’s emphasis on consumer protection not only indicates a high aspirational goal, but also means a multilevel and specific effort to enforce regulations and prosecute apparent bad actors.
Second, it is useful to note the realistic difficulties inherent in widespread collaboration between intergovernmental agencies. The EO leads at least five government agencies to research, research and develop policy approaches in this area. Although most agencies have been given a long period of time (ranging from 120 days to a year), the practical reality is that each agency has a unique purpose and policy that may not always be symbiotic with those of other agencies. This is not to say that collaboration will fail, but expectations that the EO should ultimately produce a comprehensive and unified government approach to digital asset policy should be silenced.
Finally, while it is certainly important to discuss what the EO says, it is interesting to note what is missing. There are no guidelines for researching or studying fiscal policy or decentralized finance (DeFi). There is not even a reference to either. As for the former, this omission is particularly evident given how many unresolved tax issues remain for both individuals and corporate entities. As for the latter, the omission is interesting given the growing amount of capital moving into the DeFi market and the uncertainty about regulatory guidance and enforcement in the developing market sector within the intersection of blockchain technologies, digital assets and financial services.
The future of payments and money
An important issue that deserves its own discussion is the emphasis that EO places on the future of payments and money. The EO emphasizes that the United States aims to establish itself as a world leader in the space of cryptocurrencies. This emphasis is particularly interesting, as it comes after a recent law that seems designed to curb the number of U.S. companies that will eventually accept cryptocurrency.
More specifically, on November 15, 2021, President Biden signed the Employment and Investment in Infrastructure Act. Although the law initiates a number of infrastructure-related projects, it also includes amendments (as of January 1, 2023) that increase cryptocurrency-related reporting requirements (as of January 1, 2024).
In short, the law states that digital assets (which are broadly defined) are considered effective. Thus, transactions in digital assets in excess of $ 10,000 must be reported on Form 8300. Failure to do so could result in potential charges for felony offenses, up to five years in prison, and no financial ceiling for penalties.
In addition, the law also advises that digital assets be specific securities, subject to reporting on Form 1099-B. This means that brokerages (anyone who regularly provides a service that performs the transfer of digital assets on behalf of another person) must report all cryptocurrency transactions that they have enabled. For companies looking to accept cryptocurrency, these new requirements impose technological, logistical, and legal burdens that can be too costly or risky to be profitable. Thus, while the EO points to the desire for U.S. global leadership in this economy, it does nothing to alleviate or repeal possible impediments to widespread adoption.
Instead, the EO’s discussion of the future of payments and money seems to focus more on the possible issuance of a central bank digital currency (CBDC) that would be backed by the Federal Reserve. While the details of any potential CBDC will be crucial, the EO seems to recognize the need for a proactive approach to addressing the speed and interoperability of the U.S. payment system. The Treasury, the Fed, and the DOJ have been in charge of several considerations regarding the adoption, legislation, and implementation of a CBDC. Some of the most important questions include:
- The use of CBDC as real-time payments.
- How a digital dollar would interact with bitcoin and other cryptocurrencies.
- The relationship between digital assets and fiat.
- The structure and interoperability of a U.S. CBDC with international counterparts based on the current state of the U.S. dollar reserve currency.
Given the broader implications and international implications that a U.S. CBDC would have on the global financial system, any serious discussion is likely to require input from the private sector, foreign banks, and other stakeholders. Although major questions remain, it is worth noting that the adoption of a CBDC by the United States could fundamentally alter the role of central and commercial banking.
Ongoing monitoring required to comply with legal and regulatory risks
All in all, EO is a positive development for the Bitcoin industry. Prior to its issuance, one of the main concerns was that it could attempt to force the imposition of rules or restrictions in a hasty and casual manner; don’t do that. Instead, EO opens the door to a constructive approach to reflective discourse and regulations by calling for a researched, calculated, and coordinated effort to address the nuances of a fast-growing industry.
That being said, while optimism in the Bitcoin industry about EO is appropriate, it should not impede dedicated and ongoing efforts to comply with current legal and regulatory requirements. For example, the Justice Department recently reported that its approach to cryptocurrency crime is evolving beyond individual bad actors and will include corporate compliance with the Bank Secrecy Act and the Anti-Money Laundering Act. As such, companies (and individuals) that are committed to bitcoin will still have to demonstrate the implementation of compliance programs tailored to the unique risks in the Bitcoin ecosystem. This may include transaction tracking systems that identify illicit activities and prioritize consumer protection.
This is a guest post by Joseph Stafford. The views expressed are purely personal and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.