Initial Thoughts on President Biden’s Recent Executive Order on Digital Assets By tZERO's Alan Konevsky

I am grateful President Biden signed the much-awaited Executive Order on policy objectives to guide responsible innovation of digital assets, safeguard against risks, and protect consumers and U.S. financial systems. Some of my early thoughts:

• We have reached a secular and irrevocable recognition of the transformational power of blockchain infrastructure and the products and services developed on it (including cryptocurrency, but this has always been about more than just crypto - it is an IT revolution).
• Far from putting a hard stop on the project (though those fears were exaggerated in my view), the framework in the order establishes a path to a national public dialogue regarding, and deeper inquiries into, the digital asset space, which is much needed.? This is a major moment for the industry.
• We have some directional guidance and an outline of a framework for the policy and regulatory community that recognizes the long-term importance of digital infrastructure and assets to the U.S. This is a plus.
• On the other hand, while a framework has been developed for further information gathering, policymaking, and regulation, it is heavy on broader policy statements (regarding consumer and investor protection, national security, and other important headline priorities that few will disagree with), but the details are unclear, as well as how actively industry players can assist in these future developments (vs. a more top-down policy-driven path).
• We, of course, will reserve judgment on the details until they are fleshed out. While the headline eschews a frontal assault on digital technology and related products (however unlikely that was), the tonal direction and messaging, including around the potentially enhanced role for the Consumer Financial Protection Bureau (CFPB) and other consumer protection agencies (as I spoke about before), does not necessarily lean in the direction of the light/no-touch regulation segment of the industry.
• Regarding digital assets and use cases beyond crypto, the order did not shed much light on the “what is a security” pain point for the industry, the line of demarcation between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) jurisdiction, or what new and expanded regimes we may expect for assets outside of SEC/CFTC jurisdiction. We will have to wait for the Financial Stability Oversight Council (FSOC)’s reports required by the order to see if these issues are fleshed out and how they are addressed. We hope that some of the legislative and regulatory initiatives on that topic carried by proposals in Congress and Commissioner Peirce are taken into account.?
• As other innovative products, including Web 3.0 and non-fungible tokens (NFTs), continue to grow and gain adoption, I hope this dialogue will lead to the creation of fair regulatory frameworks for new and emerging technologies.??
• In particular, it remains to be seen to what extent the decentralization premise of blockchain infrastructure - the key part of this IT and product revolution - will be embraced or tolerated, or whether the policy and regulatory bias will continue to be in favor of centralization and intermediation. We also recognize, however, that a digitally native, self-regulating, technology-led, and decentralized value ecosystem is a model and the journey is iterative, incremental, and one that will include a range of market participants (step-by-step).
• With respect to Central Bank Digital Currency (CBDC)s, I sense that this topic, although it appears further down in the order, is critical for this Administration and that U.S. leadership in many ways also means continued U.S. dollar leadership. The order recognizes that U.S. leadership and the role of the U.S. dollar in international trade and finance, as well as the control it has over the dollar market plays as an instrument of foreign policy, both go hand-in-hand. That includes the dollar’s status as a reserve currency, which may be jeopardized by falling behind other countries on fiat digitization (such as China). This debate, however, needs to take our values as a society into account given the power of CBDCs. To be clear, that power can do much good if properly designed, and in fact, faster cash is a great thing, including for securities settlement, which tZERO long advocated for.?
• While a U.S. CBDC is in development, we should continue to assess how and whether private substitutes like stablecoins can act as alternative mediums of exchange that enable fast and efficient payment solutions. The order calls out stablecoins and the recent President’s Working Group (PWG) and Treasury positions, and I expect more concrete developments on stablecoins and stablecoin issuers in a relatively shorter order, consistent with the bank/bank-like regulatory framework in the earlier guidance - (I reserve my thoughts on the merits of that framework for now).
• As we have called for in the past, while a CBDC is under development, we must also consider the on- and off-ramps between digital assets and the traditional banking and financial systems. We will also be monitoring closely to what degree controls over fiat on- and off- ramps and cash settlement trump or limit the impact of apparent digital asset innovation in that manner.
• There was also a strong emphasis on combating the illicit use of digital assets for money laundering - a sentiment that I and most in our industry have long championed. I am, however, interested in learning more about what the Administration has in mind since the U.S. has an expansive AML/KYC regime already in place, which applies to financial services providers regardless of the asset class. We should recognize that the nature of products leveraging digital infrastructure lends themselves to combating money laundering more easily than certain opaque physical assets, such as physical art, cash, and certain precious commodities, which are used to hide and launder wealth. The transition to digital art/NFTs, for example, sheds light on the sources of wealth that can be easily hidden when transacting their physical counterparts. The compliance tools to trace and analyze sources already exist and are utilized in the digital space.?
• The order also directs regulators to focus on climate change considerations; the energy footprint of distributed network participants, such as miners, will be a key topic, including publicly-traded companies in the sector. I believe this should be used to spur clean energy usage, which is already a focus for many miners, and drive innovation instead of pushing critical distributed infrastructure and capital offshore.
• Separation and division of powers is very important - but the fragmentation of regulatory jurisdiction at federal and state levels has been one of the reasons behind the lack of regulatory and industry progress on blockchain and digital assets (including versus other countries). A cohesive and coordinated response would be a very virtuous outcome of the President’s initiative.???
• Finally, there was some anticipation that the digital asset framework would be a public-private partnership during the consideration and development phase. I am still hoping this is the case and that the various working groups will include industry voices. But, I would have liked to see more guidance on this partnership.?

Overall, I am encouraged. The question is not “if” anymore, it is “how fast” and whether the U.S. will lead or follow.?

We need intelligent, responsible regulatory guardrails to support the transition from the innovator/pioneer phase to the full-scale consumer adoption phase (including as large legacy market participants continue to engage with this technology and related products, together with or alongside the pioneers in this 3.0 phase of the blockchain innovation cycle) - these are the building blocks that are already in place as Web 3.0 applications and digital-first communities emerge. It is also important that current geopolitical turbulence does not lead to policy choices on digital innovation (particularly cryptocurrencies) that are inconsistent with positive long-term objectives and overrotate in response to misperceived risks. We likewise hope that regulation will respect the principle that policymakers should not pick technology winners and losers (whether it is blockchain versus non-blockchain applications or among evolving blockchain network protocols and standards, including Proof-of-Work and Proof-of-Stake models) - but, at the same time, we recognize that technology is not just an impact-neutral concept and does not exist in a vacuum, particularly with respect to how it is utilized to deliver financial products and services to investors and consumers and its ESG impacts. We do, however, expect that any stuck policy-driven assessments also take into account analogous impacts of traditional banking and finance, assessing in a fair and transparent way.?

The order promises regulatory guardrails - it is incumbent on regulators and the industry to make themselves available to support the Administration’s efforts to adopt those guardrails in a reasonable and measured way that advances innovation and balances key concerns like consumer protection, national security, and financial inclusion.

This article was authored by Alan Konevsky, tZERO’s Executive Vice President and Chief Legal & Corporate Affairs Officer.