On March 9, 2022, Bitcoin prices surged and many in the crypto community celebrated as the Biden administration announced a sweeping executive order that acknowledges the key role digital assets will play in global financial systems. While the Order embraces crypto as the wave of the future, it calls for an intense focus on the industry that will undoubtedly lead to increased oversight and enforcement. Businesses that have believed themselves to be operating in a legal gray area may soon find themselves more explicitly subject to many of the same regulations as traditional financial service providers. The Order provides a simple rationale for aligning the new industry with existing regulatory standards: “same business, same risks, same rules.”
There is no cookie-cutter approach to analyzing how the coming changes will impact a business. We are tracking developments to help our clients look over the horizon and plan ahead. Below are the key takeaways from the Order:
- The Order calls for an “unprecedented focus of coordinated action” to address the illicit use of digital assets. This will likely lead to increased criminal enforcement—including holding companies accountable for illegal activity perpetrated through their networks.
- Numerous agencies have been tasked with developing policies and regulatory frameworks to protect consumers, investors, and businesses in the crypto sphere, with additional reporting to come as soon as within 90 days.
- The administration supports responsible innovation related to digital assets, meaning technological advances that address privacy, security, controls against exploitation, and environmental responsibility.
- These directives build on initiatives that have been pursued at the agency level, such as the creation of a DOJ task force to investigate and prosecute crypto crime.
The Biden administration’s move towards more digital asset oversight is now directed from the top. President Biden’s March 9 Executive Order calls for an “unprecedented focus of coordinated action” across all government agencies to mitigate the risks posed by the illicit use of digital assets. And this focus is not just domestic; the Order also directs agencies to work with foreign partners to align international frameworks and coordinate responses to risks—which may involve cross-border investigations and prosecution of misconduct. While the Order suggests the government will embrace digital assets in an unprecedented way, there is no doubt that increased criminal and regulatory enforcement will soon follow.
1. The sweeping Order outlines a “whole-of-government approach” to setting policy, establishing regulatory frameworks, and mitigating risks associated with digital assets.
Citing the explosive growth in digital assets, the Order makes the case for stronger oversight and increased regulation of cryptocurrencies. It announces six key priorities:
- Protecting Consumers, Investors, and Businesses: The Treasury Department and other agency partners will develop policy recommendations to address the risks and opportunities of digital assets. Additionally, the Attorney General and others will report on the role of law enforcement agencies in detecting, investigating, and prosecuting crypto crime, and recommend appropriate regulatory or legislative actions.
- Protecting U.S. and Global Financial Stability: The Financial Stability Oversight Council will identify economy-wide financial risks posed by digital assets and develop proposals to address such risks and any associated regulatory gaps.
- Mitigating Illicit Finance and National Security Risks: The Order emphasizes the growing use of digital assets to facilitate cybercrime, money laundering, terrorist and proliferation financing, fraud, theft, and corruption. Building on the Treasury Department’s National Strategy for Combating Terrorist and Other Illicit Financing, a group of agencies will evaluate “opportunities to mitigate such risks through regulation” and develop a coordinated action plan. This plan will, among other things, address the role of law enforcement to increase compliance with AML/CFT, focusing on decentralized financial ecosystems, peer-to-peer payment activity, and obscured blockchain ledgers.
- Reinforcing U.S. Leadership in the Global Financial System: The Department of Commerce will work with other agencies on a framework to drive U.S. competitiveness and leadership in, and leveraging of, digital asset technologies. The Treasury Department will similarly work across government to establish a framework for international engagement on issues such as foreign assistance, global compliance, and the promotion of international standards.
- Promoting Access to Safe and Affordable Financial Services: The Treasury Department and other relevant agencies will produce a report on the future of money and payment services, recognizing the national interest in ensuring access to safe and affordable financial services.
- Supporting Responsible Innovation: Various agencies will study and support technological advances in the responsible development, design, and implementation of digital asset systems. This means ensuring that digital asset technologies include privacy and security in their architecture, integrate controls to defend against illicit exploitation, and reduce negative climate impacts and environmental pollution from cryptocurrency mining.
Additionally, the Order places the “highest urgency” on research and development into the creation of a U.S. Central Bank Digital Currency (CBDC), which it says has the potential to support efficient and low-cost transactions and foster greater access to the financial system. The Treasury Department and other agencies have been tasked with analyzing the potential implications of launching a U.S. CBDC.
2. The Executive Order comes on the heels of a new DOJ task force, the National Cryptocurrency Enforcement Team, aimed at investigating and prosecuting crypto crime.
In October 2021, Deputy Attorney General Lisa Monaco announced the creation of a National Cryptocurrency Enforcement Team (NCET) to “tackle complex investigations and prosecutions of criminal misuses of cryptocurrency,” including money laundering, ransomware and extortion schemes, and trading on dark markets for illegal drugs, weapons, and hacking tools. The NCET is staffed by DOJ prosecutors with backgrounds in cryptocurrency, cybercrime, money laundering, and forfeiture. They work closely with various DOJ sections, U.S. Attorneys’ Offices, and the FBI. According to NCET Director Eun Young Choi, “the NCET will play a pivotal role in ensuring that as the technology surrounding digital assets grows and evolves, the department in turn accelerates and expands its efforts to combat their illicit abuse by criminals of all kinds.” The creation of this task force suggests that the DOJ has both the resources and the will to investigate allegations of wrongdoing in the crypto sphere, and companies must remain vigilant in light of the increased risk of regulatory scrutiny.
3. The SEC has expressed a strong interest in regulating crypto trading platforms, while other agencies have announced a series of “policy sprints” focused on crypto assets.
For the SEC, the question of whether the agency will regulate cryptocurrency exchanges is not a matter of if, but when. When asked by reporters in January whether 2022 will be the year that the SEC starts regulating crypto trading platforms, SEC Chairman Gary Gensler responded: “You shouldn’t put timelines on yourself, but I will say I sure hope so.” He went on to caution: “To the extent that folks are operating outside the regulatory perimeter, but are supposed to be inside, we will bring enforcement actions.” This calls to mind the question of whether cryptocurrencies are securities, which, if answered in the affirmative, brings them well within the reach of the SEC’s Enforcement Division. While the answer may differ depending on the currency, Chairman Gensler has expressed a view that most cryptocurrencies are indeed securities and thus subject to regulation by the SEC.
4. Nearly every relevant agency is marching towards more regulation.
The SEC and the Treasury Department are leaders in this space, but it seems that no agency wants to be left behind when it comes to regulating cryptocurrencies. At the same time that the DOJ and SEC were pursuing their own crypto strategies, the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency conducted a series of interagency “policy sprints” focused on crypto assets. Their goal was to analyze the applicability of existing regulations to crypto activities and establish a road map for further guidance. They promised to “provide greater clarity on whether certain activities related to crypto-assets conducted by banking organizations are legally permissible” and articulate expectations for compliance with existing laws. Other regulatory initiatives being pursued at the agency level, including by the Treasury Department’s Office of Foreign Assets Control (OFAC) and Financial Crimes Enforcement Network (FinCEN), are detailed in our 2021 Year-End Crypto Roundup.
5. Up until now, regulators have had to address misconduct in the crypto market using outdated laws that didn’t always fit. This is about to change—giving regulators more tools (and power) than ever.
Even without a coordinated strategy or crypto-specific regulatory framework, agencies have found ways to hold companies and individuals accountable for crypto-related misconduct. For example, the SEC has brought numerous enforcement actions for fraudulent and unregistered digital asset offerings, and the DOJ recently arrested two individuals in connection with an attempt to launder $4.5 billion in stolen cryptocurrency. Last year, FinCEN and the Commodity Futures Trading Commission (CFTC) reached a $100 million settlement with cryptocurrency exchange BitMEX, and BitMEX founders recently pled guilty to criminal Bank Secrecy Act (BSA) regulations stemming from the company’s willful failure to establish, implement, and maintain an AML program. But despite these efforts, without tailored regulation, illicit activity is bound to fall through the cracks. The current landscape is bound to change dramatically as a result of the Biden administration’s Executive Order, and even companies operating entirely within the law need to be ready to shift how they do business to adapt to changing regulations. Whatever comes next, we are tracking developments closely to help our clients navigate these changes and mitigate regulatory and enforcement risk.
 See Board of Governors of the Federal Reserve, Money and Payments; The U.S. Dollar in the Age of Digital Transformation (Jan. 2022).
 U.S. Dep’t of Justice, Press Release, Deputy Attorney General Lisa O. Monaco Announces National Cryptocurrency Enforcement Team (Oct. 6, 2021).
 U.S. Dep’t of Justice, Press Release, Justice Department Announces First Director of National Cryptocurrency Enforcement Team (Feb. 17, 2022).
 Jennifer Schonberger, SEC’s Gensler wants crypto exchange regulation in 2022, warns on stablecoin, Yahoo Finance (Jan. 20, 2022).
 Cheyenne Ligon, Gensler’s Crypto Testimony: 6 Key Takeaways, CoinDesk (Oct. 6, 2021).
 Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Joint Statement on Crypto-Asset Policy Sprint Initiative and Next Steps (Nov. 23, 2021).
 See U.S. Securities & Exchange Commission, Cyber Enforcement Actions.
 U.S. Dep’t of Justice, Press Release, Two Arrested for Alleged Conspiracy to Launder $4.5 Billion in Stolen Cryptocurrency (Feb. 8, 2022).