Joseph Stafford is a partner in the law firm of Wilson Elser and advises customers in the practice areas of Intellectual Property, Regulatory Compliance and Corporate/D&O Risk Management.
By signing an executive order (EO) on cryptocurrencies, President Biden has signaled his openness to the potentially positive impact of the technology. This is a significant and encouraging development for an asset class (digital assets) that recently surpassed a $3 trillion market cap. If there were ever fears of a widespread international or US-led crackdown on bitcoin, those appear to have disappeared and the United States appears to have announced its intention to take international leadership in this area. However, it would be naïve to suggest that EO will result in a more relaxed legal or regulatory scrutiny.
By overlaying the EO with the latest legal and regulatory developments, we can gain a better understanding of what to expect next after the EO of 9 March 2022.
Reasons for cautious optimism
For a long time, the government’s view of Bitcoin focused on illicit activities such as ransomware, sanctions avoidance, and terrorist financing. While the EO suggests the government is now also considering the technology’s potential positive impacts, it still specifically cites consumer protection and illicit financing as a top priority. In this context, several points are worth mentioning.
First, the EO repeatedly emphasizes consumer protection, calling for an “unprecedented focus of coordinated action” to mitigate the illicit funding and national security risks posed by cryptocurrencies. This focus becomes much more interesting when viewed alongside recent regulatory activity.
For example, we are weeks away from a report released by the US Treasury Department on March 1, 2022, which indicated that one of the most significant illicit finance threats facing the United States is the “increasing digitization” of payments and financial services. This report urged industry participants – and in particular “virtual asset service providers” – to diligently fulfill their obligations under the Bank Secrecy Act and related regulations. (Ironically, Treasury Secretary Janet Yellen released a statement on the EO before it was actually released. The statement, which has since been removed, suggests what may be an overly enthusiastic desire by the Treasury to work with other agencies to ensure the focus isn’t just that lies to promote a more efficient financial system, but also to combat illicit financing and risks to its stability.)
Additionally, we are three months away from the appointment of Eun Young Choi as the first director of the recently formed National Cryptocurrency Enforcement Team (NCET) on February 17, 2022. NCET was established by the US Department of Justice (DOJ) to serve as a cryptocurrency-specific enforcement team tasked with investigating and prosecuting complex cases of criminal cryptocurrency abuse. Additionally, the NCET announcement was accompanied by news about the FBI’s new Virtual Asset Exploitation Unit, which will work with NCET to provide technical support and training related to blockchain analysis and asset seizures. Thus, EO’s emphasis on consumer protection demonstrates not only a lofty aim, but also a multifaceted, focused effort to enforce regulations and prosecute seemingly bad actors.
Second, it is useful to point out the realistic difficulties inherent in widespread intergovernmental cooperation. The EO directs at least five government agencies to research, investigate and develop policy approaches in this area. While most agencies have been given a long time frame (from 120 days to a year), the practical reality is that each agency has a unique purpose and policy that may not always be symbiotic with those of other agencies. That’s not to say the collaboration will fail, but expectations that the EO will eventually produce a comprehensive, unified government approach to digital asset policy should be tempered.
Finally, while it’s certainly important to discuss what the EO is saying, it’s interesting to note what’s missing. There is no policy examining or investigating tax policy or decentralized finance (DeFi). There is not even a hint of either. With regard to the former, this omission is particularly glaring given how many tax issues remain unresolved for both individuals and corporations. Regarding the latter, the omission is interesting given the increasing amount of capital flowing into the DeFi market and the uncertainty surrounding regulatory guidance and enforcement in the evolving market sector at the intersection of blockchain technologies, digital assets and financial services.
The future of payments and money
An important topic that deserves a discussion of its own is the emphasis the EO places on the future of payments and money. The EO emphasizes that the United States aims to establish itself as a global leader in cryptocurrency. This emphasis is particularly interesting as it follows a recently passed law that appears aimed at curbing the number of US companies that will eventually accept cryptocurrencies.
More specifically, on November 15, 2021, President Biden signed the Infrastructure Investment and Jobs Act into law. While the law initiates a number of infrastructure-related projects, it also includes amendments (effective January 1, 2023) that tighten cryptocurrency-related reporting requirements (effective January 1, 2024).
In short, the law stipulates that digital assets (which are broad) are considered cash. Therefore, digital asset transactions over $10,000 must be reported on Form 8300. Failure to do so could result in possible criminal charges, up to five years in prison and no financial cap on penalties.
In addition, the law notes that digital assets are certain securities that are subject to Form 1099-B reporting. This means that brokers (any person who regularly provides a service that performs the transfer of digital assets on behalf of another person) must report every cryptocurrency transaction they facilitate. For businesses looking to accept cryptocurrency, these new requirements present technological, logistical, and legal burdens that may be too costly or too risky to be cost-effective. While the EO signals a desire for US global leadership in this economy, it does nothing to mitigate or remove the potential obstacles to widespread adoption.
Instead, EO’s discussion of the future of payments and money appears to be more focused on the possible issuance of a central bank digital currency (CBDC) that would be backed by the Federal Reserve. While the details of a potential CBDC will be crucial, the EO appears to recognize the need for a proactive approach to address the speed and interoperability of the US payments system. The Treasury Department, the Fed, and the DOJ have all been tasked with various deliberations on the adoption, legislation, and implementation of a CBDC. Some of the biggest questions concern:
- Using CBDCs as real-time payments.
- How a digital dollar would interact with bitcoin and other cryptocurrencies.
- The relationship between digital and fiat assets.
- The structure and interoperability of a US CBDC with international counterparts based on the US dollar’s current reserve currency status.
Given the broader implications and international consequences that a US CBDC would have on the global financial system, any serious discussion would likely require input from the private sector, foreign banks and other stakeholders. While big questions continue to arise, it’s worth noting that the United States’ adoption of a CBDC could fundamentally change the role of both central and commercial banking.
Continued vigilance required to comply with legal and regulatory risks
Ultimately, the EO is a positive development for the bitcoin industry. Prior to its issuance, one of the main concerns was that it might attempt to enforce the imposition of rules or restrictions in a rash and arbitrary manner; it doesn’t. Instead, the EO opens the door to a constructive approach to thoughtful discourse and regulation, calling for a researched, calculated, and coordinated effort to address the nuances of a fast-growing industry.
While the optimism in the bitcoin industry about the EO is warranted, this should not hamper ongoing dedicated efforts to comply with current legal and regulatory requirements. For example, the DOJ recently specifically stated that its approach to cryptocurrency crime will evolve beyond individual bad actors and will include corporate compliance with the Bank Secrecy Act and the Anti-Money Laundering Act. As such, companies (and individuals) dealing with bitcoin must continue to demonstrate the implementation of compliance programs tailored to the unique risks in the bitcoin ecosystem. This may include systems to monitor transactions that would allow illegal activity to be identified and consumer protection prioritized.
This is a guest post by Joseph Stafford. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.