Joseph Stafford is a partner at the law firm Wilson Elser and provides advice to clients in the practice areas of Intellectual Property, Regulatory Compliance, and Enterprise/D&O Risk Management.
By signing an Executive Order (EO) on cryptocurrencies, President Biden signaled an openness to the potentially positive impacts of technology. This is an important and encouraging development for an asset class (digital assets) that recently surpassed $3 trillion in market capitalization. If there were ever fears of a widespread international or US crackdown on Bitcoin, these seem to have subsided and the US seems to have signaled its intention to be an international leader in the field. That said, it would be naïve to suggest that EO will lead to relaxed legal or regulatory scrutiny.
By overlaying the EO with recent legal and regulatory developments, we can better understand what to expect following the March 9, 2023 EO.
Reasons for cautious optimism
For some time, the government’s view of Bitcoin has focused on illicit activities such as ransomware, sanctions evasion, and terrorist financing. Although the EO suggests the government is now also considering the potentially positive impact of technology, it still explicitly cites consumer protection and illicit finance as top priorities. In this respect, several points deserve to be underlined.
First, the OE repeatedly emphasizes consumer protection and calls for an “unprecedented focus of coordinated action” to mitigate the illicit finance and national security risks posed by cryptocurrencies. This direction becomes much more interesting when considered alongside recent regulatory activity.
For example, we are weeks away from a report released by the US Department of the Treasury on March 1, 2023, which indicated 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 players – 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 released a statement on the EO before it was published. The statement, which has since been deleted, indicated a perhaps overenthusiastic desire on the part of the Treasury to work with other other agencies to ensure that the focus is not just on promoting a more efficient financial system, but also on tackling illicit finance and risks to its stability.)
Additionally, we are three months away from the February 17, 2023 appointment of Eun Young Choi as the first director of the newly formed National Cryptocurrency Enforcement Team (NCET). NCET was formed by the United States Department of Justice (DOJ) to serve as a cryptocurrency-specific enforcement team responsible for investigating and prosecuting complex cases involving the misuse of cryptocurrency. Additionally, the NCET announcement was accompanied by information about the FBI’s new Virtual Assets Operating Unit, which will work with the NCET and provide technical assistance and training related to blockchain analysis and foreclosures. of assets. Thus, the EO’s emphasis on consumer protection not only indicates a lofty high goal, but also signifies a targeted, multi-level effort to enforce regulations and prosecute apparent bad actors.
Second, it is useful to note the realistic difficulties inherent in broad collaboration among intergovernmental bodies. The OE leads at least five government agencies to research, study and develop policy approaches in this area. While most agencies were given a long timeline (ranging from 120 days to one year), the practical reality is that each agency has a unique objective and directive that does not always align with those of other agencies. That’s not to say the collaboration will fail, but expectations that the OE will eventually produce a comprehensive, unified government approach to digital asset policy should be muted.
Finally, while it’s certainly important to discuss what the EO says, it’s worth noting what’s missing. There is no guideline to investigate or study fiscal policy or decentralized finance (DeFi). There is not even a reference to either. As for the first, this omission is particularly glaring given the number of unresolved tax issues for both natural and legal persons. Regarding the latter, the omission is interesting given the growing amount of capital moving into the DeFi market and the uncertainty over regulatory guidance and enforcement in the developing market sector at the moment. intersection of blockchain technologies, digital assets and financial services.
The future of payments and money
An important issue that deserves its own discussion is EO’s focus on the future of payments and money. The EO points out that the United States aims to establish itself as a world leader in the field of cryptocurrencies. This emphasis is particularly interesting, as it follows recent legislation that appears designed to limit the number of US companies that will eventually accept cryptocurrency.
Specifically, on November 15, 2021, President Biden signed the Infrastructure Investment and Jobs Act. While the law initiates a number of infrastructure-related projects, it also includes amendments (effective January 1, 2023) that strengthen reporting requirements related to cryptocurrency (effective January 1, 2024).
In short, the law provides that digital assets (which are broadly defined) are considered cash. Thus, digital asset transactions over $10,000 must be reported on Form 8300. Failure to do so could result in possible felony charges, up to five years in prison, and no financial cap on punishments.
In addition, the law also states that digital assets are specified securities, subject to reporting on Form 1099-B. This means that brokers (anyone who regularly provides a service that transfers digital assets on behalf of another person) must report every cryptocurrency transaction they have enabled. For businesses looking to accept cryptocurrency, these new requirements impose technological, logistical, and legal burdens that may be too costly or too risky to be profitable. So while the EO signals a desire for U.S. global leadership in this economy, it does nothing to mitigate or remove potential barriers to widespread adoption.
Instead, the EO’s discussion of the future of payments and money seems to focus more on the potential issuance of a central bank digital currency (CBDC) that would be backed by the Federal Reserve. . While the details of any potential CBDC are crucial, the EO seems to recognize the need for a proactive approach to addressing the speed and interoperability of the US payment system. The Treasury, the Fed, and the DOJ have all been tasked with various considerations regarding the adoption, legislation, and implementation of a CBDC. Some of the biggest questions involve:
- The use of CBDCs 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 US CBDC with its international counterparts based on the current reserve currency status of the US dollar.
Given the broader implications and international consequences that a US CBDC would have on the global financial system, any serious discussion would likely require input from the private sector, foreign banks, and other stakeholders. While big questions continue to arise, it should be noted that the adoption of a CBDC by the United States could fundamentally change the role of central and commercial banks.
Ongoing vigilance required to comply with legal and regulatory risks
Ultimately, the OE is a positive development for the Bitcoin industry. Prior to its release, one of the main concerns was that it might attempt to force the imposition of rules or restrictions in a hasty and haphazard fashion; it doesn’t do that. Instead, the OE opens the door to a constructive approach to thoughtful discourse and regulation by calling for a researched, calculated and coordinated effort to address the nuances of a rapidly growing industry.
That said, while the optimism in the Bitcoin industry about EO is appropriate, it should not hamper continued and dedicated efforts to comply with current legal and regulatory requirements. For example, the DOJ recently expressly notified that its approach to cryptocurrency crime is evolving beyond individual malicious actors and will include corporate compliance with bank secrecy law and anti-money laundering law. As such, businesses (and individuals) that engage with Bitcoin will still need to demonstrate the implementation of compliance programs tailored to the unique risks of the Bitcoin ecosystem. This can include transaction monitoring systems that would identify illicit activity and prioritize consumer protection.
This is a guest post by Joseph Stafford. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or bitcoin magazine.