White House Publishes "Comprehensive Framework for Responsible Development of Digital Assets"
On September 16, 2022, the White House released its Comprehensive Framework for Responsible Development of Digital Assets, the first step in its “whole-of-government” strategy on regulating digital assets. This framework is a result of President Biden’s Executive Order, signed in March 2022, which instructed US government agencies to produce various reports, studies and policy recommendations for the responsible development of digital assets. The order specified research in seven key areas, such as illicit finance, consumer protection, and US leadership in the global financial system. For a detailed review of these priorities, read our blog post on President Biden’s Executive Order.
The executive order culminated in nine reports from various agencies, including the Treasury Department and Department of Justice (DOJ). The most pertinent takeaways from these reports are outlined below.
The DOJ’s report discusses the role of law enforcement with respect to digital asset criminal activity. The DOJ proposes three policy changes aimed at combatting financial crime: (1) extending laws relating to the tipping-off of investigation suspects to virtual asset services providers; (2) improved enforcement efforts against operations involved in unlicensed money transmission; and 3) lengthening certain statutory limitation periods to mitigate complexities in digital asset transactions. The DOJ also describes investigative challenges posed by digital assets, which it proposes to mitigate by establishing a group of federal prosecutors focused on training and expertise in the digital asset space.
The Treasury Department published three reports addressing illicit finance risk, consumer and investor protection, and the future of money and payment systems.
- The Illicit Finance Report is focused on addressing gaps in existing anti-money laundering (AML) and countering the financing of terrorism (CFT) regimes. The report highlights the need for global AML regulation and enforcement, as “criminal organizations are often the perpetrators of ransomware crimes, leveraging global infrastructure and money laundering network to carry out their attacks.” The Treasury undertakes to complete an illicit finance risk assessment on decentralized finance (DeFi) by the end of February 2023 and an assessment of non-fungible tokens (NFTs) by July 2023. President Biden will also evaluate whether to call upon Congress to amend the Bank Secrecy Act (BSA), anti-tip-off statutes, and laws against unlicensed money transmission.
- The Report on Consumer Protection makes three key recommendations to safeguard consumers, investors and businesses involved in the digital asset sector: (1) vigilant monitoring for unlawful activity, aggressive pursuit of investigations and continued enforcement actions; (2) collaboration among US regulatory agencies to promote consistent and comprehensive oversight to address risks; and (3) ensure that US citizens, investors and businesses can access trustworthy information pertaining to digital assets. The Treasury recommends fulfilling its education mandate through the Financial Literacy and Education Commission, which coordinates financial education efforts throughout the federal government and supports the promotion of financial literacy by the private sector. The Treasury also recommends issuing a public request for comment and allowing interested parties to provide input, data, and recommendations.
- The Future of Money and Payments Report reviews the current monetary system while offering a preliminary exploration into privately issued stablecoins and a central bank digital currency (CBDC). CBDCs are cited as potentially beneficial, but the report imparts the necessity of further research and development on the underlying technology. Going forward, the Treasury will lead an interagency working group considering the potential implications of a U.S. CBDC by leveraging cross-government technical expertise and sharing information with partners.
Collaboration is a consistent theme throughout these reports and the related Fact Sheet released by the White House. The Fact Sheet outlines key priorities within the reports, such as how the Treasury Department plans to work closely with financial institutions to bolster their capacity to identify and mitigate cyber vulnerabilities. This will be accomplished through group hackathons (tech sprints) and by allowing financial service businesses opportunities to showcase their approaches to AML and CFT (innovation hours). The Treasury Department will also work with other agencies to help developing countries build digital asset infrastructure and services, while the Department of Commerce will assist cutting-edge US financial technology and digital asset firms with promoting their products globally. Both the DOJ and Treasury also plan to collaborate with other government agencies, US allies and international organizations to analyze emerging strategic risks related to digital assets.
Although more muted than our southern neighbour, our federal government and financial services regulators have also expressed intentions to review and regulate the digital asset sector.
The federal government announced its Digitization of Money Review in the 2022 Budget, which will examine how to adapt the financial sector to manage new digitization risks while maintaining financial stability. The first phase of the review will be directed at digital currencies, including cryptocurrencies, stablecoins, and a potential CBDC. For more detail on the 2022 Budget, please read our full blog post here.
Superintendent of Financial Institutions Peter Routledge recently addressed how the Office of the Superintendent of Financial Institutions (OSFI) intends to proceed with respect to digital asset regulation in a speech on September 20, 2022. Superintendent Routledge noted the importance of global developments in digital asset regulation, stating, “given that technological developments are not isolated to the Canadian financial system, we are also looking to our international counterparts. We would like to understand the similarities and differences to the Canadian environment and how other jurisdictions are addressing the digitalization of financial services.” Superintendent Routledge also shared plans to “refine the approval process so new entrants can join the regulatory system faster and more safely” and stated that “[OSFI is] working closely with our federal and provincial partners to ensure an appropriate and coordinated Canadian regulatory response to stablecoins. At the same time, [OSFI is] also working with various government partners and international organizations to assess the implications of digital money on our regulatory frameworks. We plan on providing additional clarity to areas of risk management and governance that are specific to stablecoin arrangements”.
In addition, earlier this year, a private members bill, Bill C-249 An Act respecting the encouragement of the growth of the cryptoasset sector, proposed requiring the Minister of Finance to develop a national framework to encourage the growth of the cryptoasset sector.
We have linked the full report from each agency below:
- White House Office of Science and Technology Policy (OSTP), Climate and Energy Implications of Crypto-Assets in the United States
- White House Office of Science and Technology Policy (OSTP), Technical Evaluation for a U.S. Central Bank Digital Currency System
- White House Office of Science and Technology Policy (OSTP), Policy Objectives for a U.S. Central Bank Digital Currency System
- Department of Justice, The Role of Law Enforcement in Detecting, Investigating, and Prosecuting Criminal Activity Related to Digital Assets
- Department of the Treasury, The Future of Money and Payments
- Department of the Treasury, Implications for Consumers, Investors, and Businesses
- Department of the Treasury, Action Plan to Address Illicit Financing Risks of Digital Assets
- Department of Commerce, Digital Asset Competitiveness Report
A report from the Financial Stability Oversight Council is still pending as of publish. For more information on the climate and energy report, please read our article highlighting the key takeaways.
For more information about our firm's Fintech expertise, please see our Fintech group page.