On March 9, 2022, the White House released its much anticipated Executive Order on Ensuring Responsible Development of Digital Assets. The 5,500-word document signals the Biden administration’s intent to seriously engage with the digital assets industry across a broad range of domains and sets forth a comprehensive agenda for cooperation across federal agencies to study various aspects of concern over the course of the coming year.

Policy Position

The Executive Order outlines a policy position that takes as its starting point the remarkable growth and staying power of digital assets. Second, the administration states clearly the central role of the United States in “responsible financial innovation” with the goal of improving access to financial services, reducing costs, and modernizing payment systems. Finally, the order outlines the importance of mitigating a whole host of risks associated with this new asset class, from illicit financing and sanctions evasion to consumer protection and systemic risk.

Objectives

The bulk of the Executive Order defines the domains of inquiry to be studied, along with a framework for roles, responsibilities, and cooperation across agencies. Within this framework, the order outlines the following primary objectives:

• The development of safeguards to ensure consumer, investor, and business protections
• The need for controls and standards that mitigate systemic risk digital assets may pose
• Continued development of controls and regulations that mitigate illicit financing and national security risks tied to ransomware and cybercrime
• US leadership in digital assets innovation as well as the development of regulatory guidance
• The need to ensure that innovation in this sector promotes safe, low-cost financial access
• The need for responsible technological development, including a consideration of privacy, human rights, and the environmental impact of activities in the sector

Central Bank Digital Currencies

The report dedicates an entire section to the administration’s position on a United States Central Bank Digital Currency (CBDC). Stating that research and development into the design and deployment of a US CBDC is of “highest urgency,” the administration instructs the Secretary of the Treasury, in conjunction with a number of federal agencies, to produce a report on the “future of money and payment systems,” with a particular focus on CBDCs and design options, potential benefits, and risks. The report raises important questions that the Fed, academic think tanks, and other sovereign nations have grappled with related to CBDC development, including questions of privacy, scalability, interoperability, and the potential for extending US dollar and economic dominance globally through this new technology. Further in the report, the administration encourages the Federal Reserve to continue its research on CBDCs, in particular, to consider the potential of CBDCs to reduce costs of payment systems and the implications for enhancing or inhibiting the Fed’s ability to utilize monetary policy to affect macroeconomic stability.

Considerations and Implications

The report demonstrates a concern with a broad range of risks, including illicit financing and national security (mentioning ransomware and cybercrime four times each), consumer/investor protections, market integrity, and systemic/macroeconomic risks. Furthermore, the report states that the US will seek to ensure that foreign CBDCs or related payment systems, with which a potential US CBDC will be interoperable, are deployed in a manner “consistent with United States values and legal requirements.” Here, the administration may be hinting at concerns with privacy and mass surveillance risks associated with CBDCs, as well as the need to shore up AML/CFT weaknesses in certain jurisdictions.

Overall, the report’s tone and content should allay industry fears that the Executive Branch would take a one-sided approach in its assessment of the industry and signal draconian regulatory issues in the future. In fact, the Executive Order demonstrates an intent to deeply engage with not only the risks but also with the potential benefits that digital assets and related technologies may confer on both individuals and the United States as a whole. First, while the report places significant emphasis on the need to study a US CBDC, it leaves room for other financial technologies, innovations, and digital assets, though mentioning none by name. Second, the report demonstrates a nuanced understanding of the environmental impact of digital currencies, referring obliquely to Bitcoin and Ethereum’s energy-intensive “proof of work” consensus mechanisms, and the need to conduct a multifaceted study that considers “grid reliability” and “energy efficiency incentives.” Finally, the report’s coordination of activities provides, at least in the short term, specific tasks for particular regulatory agencies, while potentially attempting to limit their remit by defining their focus. Relatedly, digital assets legislation that is being prepared by members of Congress will now have to consider their alignment, or lack thereof, with the above Executive Order.