Crypto(nite)?: White House Releases Framework For Regulating Cryptocurrency
On September 16, 2022, following President Joe Biden’s Executive Order earlier this year, the White House released its first-ever comprehensive framework for regulating cryptocurrency (the “Framework”). (The White House). After six months of collaboration between agencies across the government, including the Securities and Exchange Commission (“SEC”) and U.S. Department of the Treasury (“USDT”), among others, the agencies developed a framework to advance several priorities relating to: 1) protecting consumers, investors, and businesses; 2) enhancing financial stability; 3) counteracting illicit finance; and 4) advancing responsible innovation. Id.
Due to cryptocurrency’s infancy in the economic world, consumers, investors, and businesses have assumed massive risks involving themselves with cryptocurrency. In a study done by the Wall Street Journal, the publication found, after reviewing documents for 1,450 digital coin offerings, that 271 of those coin offerings contained disclosure or transparency problems, such as plagiarized investor documents, missing or fake executive teams, and promises of guaranteed returns on investment. (Shifflett, WSJ). The Framework encourages regulators, such as the SEC and Commodity Futures Trading Commission (“CFTC”), to investigate and pursue enforcement actions against illegitimate practices within the cryptocurrency space. (Sen, Jurist). Additionally, the Framework has delegated the Financial Literacy Education Commission (“FLEC”) to lead awareness efforts to educate consumers about the inherent risks involving cryptocurrency. (The White House). These awareness efforts will focus on how to identify common fraudulent practices and how to report misconduct. Id.
Instability within the cryptocurrency market was another focal point of the Framework. Even cryptocurrencies like Stablecoins, which are tied to other fiat currencies to better secure their value, are volatile and have been proven risky for investors. (Deshmukh, WEForum). For example, in May 2022, a market crash involving a Stablecoin led to an erasure of $600 billion of investor and consumer funds after an ensuing wave of insolvencies followed in the aftermath of the crash. (The White House). Under the Framework, the Department of the Treasury (“USDT”) has been tasked to work with financial institutions to strengthen their ability to recognize and mitigate liabilities within the cryptocurrency space. Id. Moreover, the USDT will also work alongside other agencies and U.S. allies, such as the Organization for Economic Co-operation and Development (“OECD”) and the Financial Stability Board (“FSB”), to identify, track, and analyze risks related to cryptocurrency that could emerge in the future. Id.
Cryptocurrency not only can create trouble due to its instability but also in its use to facilitate organized crime, such as money laundering and ransomware. (Sigalos, CNBC). Cryptocurrency has assisted a wave of cybercrime due to its ability to be transferred without a financial intermediary. (The White House). To combat this, President Biden is evaluating whether to ask Congress to amend the Bank Secrecy Act (“BSA”) to include cryptocurrency providers, cryptocurrency exchanges, and nonfungible token (NFT) platforms. Id. By doing so, lenders would become legally obligated under the BSA to report any suspicious transactions to the USDT. (Lang, Reuters) Also under consideration, is whether to raise penalties for unauthorized money transfers to equal the penalties of the crimes listed under various money-laundering statutes. (The White House).
With the U.S. being a hotspot for roughly half of the world’s 100 most valuable financial tech companies, the U.S. is inclined to play a critical role in advancing responsible innovation. (CFTE). The Framework assigned the responsibility of developing a “Digital Assets Research and Development Agenda” to the Office of Science and Technology (“OSTP”) and the National Science Foundation (“NSF”). (Reamer, AEA). Additionally, the USDT and financial regulators are encouraged to provide guidance, best-practices, and technical assistance to innovative U.S. firms. Id. Furthermore, the Department of Energy (“DOE”) and Environmental Protection Agency (“EPA”) will consider the environmental impacts of the cryptocurrency market, create performance standards, and provide local authorities with the expertise and resources to curb environmental harms. Id.
The Framework is encouraging and promising. However, more tangible actions must be implemented. Recent events, such as the May 2022 Stablecoin crash, show that the U.S. needs to implement stronger measures that demonstrate involvement from a multitude of government agencies to account for all of the ways cryptocurrency could impact the economy. Simply recommending, encouraging, and asking agencies to consider agency action is not enough. Agencies must be authorized powers and additional funding to effectively investigate and take enforcement actions against violators. Cryptocurrency is going to play a role in the future of American and global commerce. Strict and swift regulations are necessary to ensure that the role cryptocurrency plays contributes positively to our society.