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Realistic Regulation: President Biden’s Digital Asset Order Avoids Industry’s Worst FearsMarch 17, 2022
President Biden’s Executive Order last week on “Ensuring Responsible Development of Digital Assets” signaled a coherent, coordinated, and deliberate approach to the regulation of the digital asset economy. While the order highlighted familiar financial and data security risks, it did not do what many issuers, platforms, and project teams had feared: impose reactive, hastily conceived rules aimed at “cracking down” on digital asset products and services. Rather, the Order confirmed that the federal government is prepared to play a more thoughtful, coordinated role in developing a framework for regulating blockchain-based finance.
The March 9 Order recognizes that the US “must maintain technological leadership in this rapidly growing space, supporting innovation while mitigating the risks for consumers, businesses, the broader financial system, and the climate.” It lays out six key priorities: consumer and investor protection; financial stability; preventing illicit finance; US leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation. And it calls for a “whole-of-government” approach, giving a host of federal agencies (from the SEC and CFPB to the DOJ and EPA) six months to issue a report on how potential regulatory and legislative actions might protect consumers, investors, and businesses, while also promoting innovation and expanding access to safe and affordable financial services.
While increased governmental attention may mean heightened scrutiny and perhaps a new push to enforce existing laws, moving away from a piecemeal approach reflects the Administration’s acknowledgement of the degree to which blockchain technology has already revolutionized the way Americans invest, create, socialize, and raise capital. As the White House notes, some 16 percent of adult Americans—40 million people—have already invested in, traded, or used cryptocurrencies. By asking federal agencies to consider proposing possible legislative changes, the Order opens the door to a more thoughtful conversation with policymakers about crypto’s role in society.
While it may be difficult to predict with precision what kind of regulation this new, coordinated approach will produce, the Executive Order indicates agencies will continue prioritizing consumer protection. With that in mind, we offer three tips for those considering or currently offering digital asset products or services.
1. Determine which regulator(s) might cover your product or service. Because the order makes clear that existing laws still apply, companies with digital asset products and services should consider how their business relates to an existing financial product or service based in fiat currency. That means identifying which regulator the company may need to answer to if it intends to develop and maintain a sustainable product. Engaging with the applicable regulator or aligning products and services based on guidance from the relevant agency may reduce risks as regulators build an enhanced regulatory framework.
2. Focus on the customer experience. One of the most challenging aspects of the administration’s focus on consumer protection is the possibility of more aggressive inquiries into unfair, deceptive, abusive acts, or practices. Applying a holistic approach to the customer experience and making sure that products align with regulatory requirements may help companies avoid heightened scrutiny, while limiting regulatory risk.
3. Pay attention to complaints. Complaints from customers and regulators drive inquiries, investigations, and even regulatory examinations. Addressing complaints proactively and watching trends may help avoid government inquiries. In particular, robust know-your-customer and anti-money-laundering protocols are crucial.
Given the many more draconian alternatives, President Biden’s Executive Order bodes well for the ever-changing digital asset ecosystem. O’Melveny maintains a deep bench of practitioners who can help clients avoid pitfalls and capitalize on the “responsible innovation” now guiding the US approach to crypto.
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. William K. Pao, an O’Melveny partner licensed to practice law in California, Elizabeth L. McKeen, an O’Melveny partner licensed to practice law in California, Pamela A. Miller, an O’Melveny partner licensed to practice law in New York, Melissa B. Guidorizzi, an O’Melveny counsel licensed to practice law in New York, and Damilola G. Arowolaju, an O’Melveny associate licensed to practice law in the District of Columbia, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
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