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Treasury seeks info on illicit finance, national security risks of digital assets
On September 19, the U.S. Treasury Department issued a request for comment (RFC) seeking feedback on illicit finance and national security risks posed by digital assets. The RFC, issued pursuant to Executive Order 14067 “Ensuring Responsible Development of Digital Assets” (covered by InfoBytes here), requests public input on illicit finance risks, anti-money laundering and combating the financing of terrorism (AML/CFT) regulation and supervision, global implementation of AML/CFT standards, private sector engagement, and central bank digital currencies. The RFC also seeks feedback on actions the U.S. government and Treasury should take to mitigate these risks, in addition to whether public-private collaboration may improve efforts to address risks. Comments on the RFC are due November 3.
“Without appropriate controls and enforcement of existing laws, digital assets can pose a significant risk to national security by facilitating illicit finance, such as money laundering, cybercrime and terrorist actions,” U.S. Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian E. Nelson said in the announcement. “As we work to implement the Illicit Finance Action Plan, hold bad actors accountable and identify potential gaps in existing enforcement, we look forward to receiving the public’s input on this urgent work.”
The RFC follows the September 16 release of Treasury’s Action Plan to Address Illicit Financing Risks of Digital Assets (covered by InfoBytes here).
White House presses regulators on framework for digital assets
On September 16, the White House published a comprehensive framework for the responsible development of digital assets, calling on federal regulators to “provide innovative U.S. firms developing new financial technologies with regulatory guidance, best-practices sharing, and technical assistance.” The framework follows an executive order (E.O.) issued by the Biden administration in March (covered by InfoBytes here), which outlined the first “whole-of-government” strategy for coordinating a comprehensive approach to ensuring responsible innovation in digital assets policy. Consistent with the E.O.’s deadline, nine reports have been submitted to President Biden to date that “call on agencies to promote innovation by kickstarting private-sector research and development and helping cutting-edge U.S. firms find footholds in global markets.” The reports also “call for measures to mitigate the downside risks, like increased enforcement of existing laws and the creation of commonsense efficiency standards for cryptocurrency mining.”
Among other things, the reports (i) direct the Federal Reserve Board to continue its research and experimentation on issuing a central bank digital currency, and request the creation of a U.S. Treasury Department-led interagency working group to support Fed efforts; (ii) encourage the SEC and CFTC to “aggressively pursue investigations and enforcement actions against unlawful practices in the digital assets space”; (iii) urge the CFPB and FTC to address consumer complaints related to unfair, deceptive, or abusive practices in the crypto space; (iv) encourage agencies to issue guidance and rules for addressing current and emergent risks in the digital asset ecosystem; (v) urge agencies and law enforcement to take joint measures to address digital asset risks impacting consumers, investors, and businesses; and (vi) encourage agencies to share data on consumers’ digital asset complaints. To promote access to safe and affordable financial services, the administration said it plans to explore how crypto-related technologies can bolster financial inclusion, and will encourage the adoption of instant payment systems, weigh recommendations for creating a federal framework for non-bank payment service oversight, and prioritize efforts to improve cross-border payment efficiency. Additionally, the administration said it is exploring the possibility of amending the Bank Secrecy Act and other related statutes to “explicitly” apply to digital asset exchanges and non-fungible token platforms, and is considering a legislative request to toughen penalties for unlicensed money transmitters and give the DOJ more jurisdictional digital asset prosecution authority.
The Treasury released three reports addressing the future of money and payment systems, consumer and investor protection, and illicit finance risks in response to the E.O. The reports, The Future of Money and Payments, Crypto-Assets: Implications for Consumers, Investors, and Businesses, and Action Plan to Address Illicit Financing Risks of Digital Assets call on regulators to mitigate crypto-related risks to consumers, investors, and businesses. “Innovation is one of the hallmarks of a vibrant financial system and economy,” Treasury Secretary Janet Yellen said. “But as we have learned painfully from the past, innovation without appropriately addressing the impact of these developments can result in significant disruptions and harm to the financial system and individuals, especially our more vulnerable populations.” The reports examine the future of digital assets and offer recommendations to address consumer and investor protection concerns, combat illicit finance risks, and improve the payments system to support a more competitive, efficient, and inclusive landscape.
The same day, the DOJ also released a report in response to the E.O. The Role Of Law Enforcement In Detecting, Investigating, And Prosecuting Criminal Activity Related To Digital Assets examines ways illicit actors exploit digital asset technologies and addresses challenges posed by digital assets to criminal investigations. The report provides recommendations to further enhance law enforcement’s ability to address digital asset crimes, such as strengthening criminal penalties and extending the statutes of limitations for crimes involving digital assets from five to ten years, and identifies three priorities: (i) “expanding to virtual asset service providers the laws preventing employees of financial institutions from tipping off suspects to ongoing investigations”; (ii) “strengthening the law criminalizing the operation of unlicensed money transmitting businesses”; and (iii) “extending the statute of limitations of certain statutes to account for the complexities of digital assets investigations.” The DOJ also launched the Digital Asset Coordinator Network, which will serve as the agency’s primary source for obtaining and disseminating information related to digital assets crimes.
Financial Services Committee Republicans ask Fed for clarification on CBDC
On September 7, Republican members of the House Financial Services Committee submitted a letter to Federal Reserve Vice Chair Lael Brainard in response to a May hearing examining the potential impact of a Central Bank Digital Currency (CBDC). The letter, among other things, requested that Brainard provide her testimony regarding the Fed’s authority under the Federal Reserve Act to issue a CBDC (and without separate specific authorizing federal legislation). Specifically, the members requested that Brainard clarify: (i) the Fed’s motivation for issuing a CBDC; (ii) the need for Congress to support a Fed-issued CBDC; (iii) the Fed’s position on individual retail accounts at the Fed; (iv) the need for Congress to authorize an intermediated CBDC model; and (v) the need for “strong support” from the Executive Branch. The members asked for a response in writing by September 30.
Treasury releases fact sheet on digital asset international engagement
On July 7, the Secretary of the Treasury released a Fact Sheet on the Framework for International Engagement on Digital Assets. The Fact Sheet was delivered to President Biden, as directed in the Executive Order on Ensuring Responsible Development of Digital Assets (E.O.) and in consultation with the Secretary of State, the Secretary of Commerce, and the heads of other relevant agencies. The E.O. outlined an interagency approach to address the risks and harness the potential benefits of digital assets and their underlying technology, and directed the Administration to promote the “development of digital asset and central bank digital currencies (CBDC) technologies consistent with [the Treasury’s] values and legal requirements.” According to the announcement, “the framework is intended to ensure that, with respect to the development of digital assets, America’s core democratic values are respected; consumers, investors, and businesses are protected; appropriate global financial system connectivity and platform and architecture interoperability are preserved; and the safety and soundness of the global financial system and international monetary system are maintained.” The announcement also noted that “a history of robust engagement provides a strong foundation for expanded, strategic engagement going forward” and highlighted other key international engagements.
U.S.-UK partnership exchanges views on crypto, digital assets
On July 1, the U.S. Treasury Department issued a joint statement providing an overview of recent meetings of the U.S.-UK Financial Innovation Partnership (FIP) where Regulatory and Commercial Pillar participants exchanged views “on topics of mutual interest in the U.S. and UK regarding crypto and digital asset ecosystems.” Participants also discussed options for deepening ties between U.S. and UK financial authorities on financial innovation. As previously covered by InfoBytes, the FIP was created in 2019 as a way to expand bilateral financial services collaborative efforts, study emerging fintech innovation trends, and share information and expertise on regulatory practices. The first meeting of the FIP took place in August 2020 (covered by InfoBytes here). Topics discussed in the most recent meeting included, among other things, crypto-asset regulation and market developments, including recent developments related to stablecoins and the exploration of central bank digital currencies, and other recent market developments on digital assets. Participants acknowledged “the continued importance of the ongoing partnership on global financial innovation as an integral component of U.S.-UK financial services cooperation.”
Brainard discusses central bank digital currency at House hearing
On May 25, Fed Governor Lael Brainard spoke before the U.S. House Financial Services Committee in a virtual hearing titled “Digital Assets and the Future of Finance: Examining the Benefits and Risks of a U.S. Central Bank Digital Currency.” According to the Committee’s memorandum regarding the hearing, the Fed defines a central bank digital currency (CBDC) as a “digital liability of a central bank that is widely available to the general public,” and though definitions vary, “understanding what distinguishes cryptocurrency from fiat government-issued currency is fundamental.” The memorandum also discussed the Fed’s publication of a discussion paper in January, Money and Payments: The U.S. Dollar in the Age of Digital Transformation, which calls for public comments on questions related to the possibility of a U.S. CBDC (covered by InfoBytes here). In Brainard’s prepared statement, she noted that the “rapid ongoing evolution” of digital assets “should lead us to frame the question not as to whether there is a need for a central bank-issued digital dollar today, but rather whether there may be conditions in the future that may give rise to such a need.” Brainard also stated that “there are risks of not acting, just as there are risks of acting.” While there has not been a decision on creating a U.S. CBDC, Brainard stated that “it is important to undertake the necessary work to inform any such decision and to be ready to move forward should the need arise.” Additionally, Brainard pointed to recent pressure on two widely used stablecoins and resulting market turmoil that “underscore the need for clear regulatory guardrails to provide consumer and investor protection, protect financial stability, and ensure a level playing field for competition and innovation across the financial system.” Brainard further stated that a U.S. CBDC could be a potential “way to ensure that people around the world who use the dollar can continue to rely on the strength and safety of the U.S. currency to transact and conduct business in the digital financial system.”
Hsu discusses stablecoins, pushes for crypto banks
On April 8, acting Comptroller of the Currency Michael J. Hsu discussed stablecoin policy considerations in remarks before the Institute of International Economic Law at Georgetown University Law Center. Hsu called for the establishment of an “intentional architecture” for stablecoins developed along the principles of “[s]tability, interoperability and separability,” as well as “core values” of “privacy, security, and preventing illicit finance.” According to Hsu, one way to mitigate blockchain-related risks would be to “require that blockchain-based activities, such as stablecoin issuance, be conducted in a standalone bank-chartered entity, separate from any other insured depository institution [] subsidiary and other regulated affiliates.” Hsu also emphasized the need to evaluate whether stablecoin issuers should be required “to comply with a fixed set of safety and soundness-like requirements (as is the case with banks)” or be allowed to pick from a range of licensing options.
Additionally, Hsu raised the question about how separable stablecoin issuers should be. “Blockchain-based money holds the promise of being ‘always on,’ irreversible, programmable, and settling in real-time,” he explained. “With these benefits, however, come risks, especially if commingled with traditional banking and finance.” Specifically, Hsu cited concerns that a bank’s existing measures for managing liquidity risks associated with traditional payments “may not be effective for blockchain-based payments,” which could conceivably accumulate over a weekend and “outstrip a bank’s available liquidity resources.” Hsu also raised concerns related to the current “lack of interoperability” should stablecoins expand from trading to payments, and stressed that “[i]n the long run, interoperability between stablecoins and with the dollar—including a [central bank digital currency]—would help ensure openness and inclusion.” He added that this “would also help facilitate broader use of the U.S. dollar—not a particular corporate-backed stablecoin—as the base currency for trade and finance in a blockchain-based digital future.”
Upcoming Treasury reports will highlight CBDC issues
On March 22, Treasury Under Secretary for Domestic Finance Nellie Liang spoke before the National Association for Business Economics on topics related to stablecoins and a possible central bank digital currency (CBDC). As instructed by President Biden’s Executive Order on digital assets (covered by InfoBytes here), Liang announced that Treasury will partner with other agencies in the coming months to produce a series of reports and recommendations focusing on (i) the future of money and payment systems, with a discussion of CBDCs; (ii) financial stability risks and regulatory gaps posed by digital assets; (iii) the use of digital assets for illicit finance and associated national security risks; and (iv) international engagement supporting global principles and standards for digital assets and CBDCs. “Regulatory policy for new financial products may need to evolve, but should follow ‘same risk, same regulation,’ in the sense that regulations should be based on risks of the activity rather than the technology itself,” Liang stressed, adding that Treasury’s work will “complement” other agency efforts such as the Federal Reserve Board’s recent discussion paper which emphasized that any CBDC should ensure users’ privacy, have an intermediated model, be transferable, and prevent illicit finance (covered by InfoBytes here).