Joseph Stafford is a partner at Wilson Elser Law Firm and provides advice to clients in the areas of intellectual property practice, regulatory compliance and enterprise risk management.
By signing the Executive Order (EO) on cryptocurrencies, President Biden signaled openness to the potentially positive effects of technology. This is a significant and encouraging development for an asset class (digital asset) that recently exceeded $ 3 trillion in market capitalization. If there has ever been any fear of a widespread international attack on Bitcoin led by the United States, they seem to have disappeared and the United States seems to have indicated its intention to be an international leader in the field. However, it would be naive to suggest that EO will lead to relaxed legal or regulatory scrutiny.
By overlapping the EO with recent legal and regulatory developments, we could gain a better understanding of what to expect next after the EO of 9 March 2022.
Reasons for guarded optimism
For some time, the government’s view of Bitcoin has focused on illegal activities such as ransomware, sanctions avoidance, and terrorist financing. Although the EO suggests that the government is now also considering the potentially positive impact of the technology, it still explicitly cites consumer protection and illegal funding as top priorities. In this regard, it is worth noting a few points.
First, the EO repeatedly emphasizes consumer protection and calls for an “unprecedented focus of coordinated action” to mitigate the risks of illicit financing and national security posed by cryptocurrencies. This focus becomes much more interesting when viewed with recent regulatory activities.
For example, we are weeks away from a report released by the U.S. Treasury Department on March 1, 2022, which indicated that one of the most significant illegal financial threats to the United States is the “increased digitalization” of payments and financial services. This report called on industry participants – and in particular “virtual asset service providers” – to remain diligent in their obligations under the Bank Secrecy Act and related regulations. (Ironically, Finance Minister Janet Yellen issued a statement on the EO before it was actually released. The statement, which has since been removed, points to perhaps the Ministry of Finance’s overly enthusiastic desire to work with other agencies to ensure the focus is not just on promoting more efficient financial system, but also to combat illegal financing and the risk to its stability.)
In addition, we are three months away from the appointment of Eun Young Choi on February 17, 2022 as the first director of the recently formed National Cryptocurrency Implementation Team (NCET). NCET was established by the U.S. Department of Justice (DOJ) to serve as a cryptocurrency-specific enforcement team tasked with investigating and prosecuting complex cases involving the criminal misuse of cryptocurrencies. In addition, the NCET announcement was accompanied by news of the FBI’s new Virtual Asset Exploitation Unit, which will work with NCET and provide technical assistance and training related to blockchain analysis and asset forfeiture. Thus, EO’s emphasis on consumer protection not only points to a lofty aspirational goal, but also marks a multi-layered, targeted effort to enforce regulations and prosecute apparently bad actors.
Second, it is useful to note the real difficulties inherent in widespread intergovernmental cooperation. The EO directs at least five government agencies to research, research, and develop policy approaches in this area. While most agencies are given a long time frame (ranging from 120 days to one year), the practical reality is that each agency has a unique purpose and directive that may not always be in symbiosis with those of other agencies. This does not mean that cooperation will fail, but expectations that the EO will ultimately produce a comprehensive, unified government approach to digital asset policy should be dampened.
Finally, while it is certainly important to discuss what the EO says, it is interesting to note what is missing. There is no directive for research or study of tax policy or decentralized finance (DeFi). Neither is even mentioned. As for the first, this omission is particularly striking given how many tax issues remain unresolved for both individuals and legal entities. As for the latter, the omission is interesting given the growing amount of capital moving towards the DeFi market and uncertainty regarding regulatory guidance and implementation in the emerging market sector within the intersection of blockchain technologies, digital assets and financial services.
The future of payments and money
One important issue that deserves its own discussion is the emphasis the EO places on the future of payments and money. The EO emphasizes that the United States is striving to establish itself as a global leader in the space of cryptocurrencies. This emphasis is particularly interesting because it comes after a recent law that seems designed to curb the number of U.S. companies that will ultimately accept cryptocurrencies.
Specifically, on November 15, 2021, President Biden signed the Infrastructure Investment and Jobs Act. Although the law launches a number of infrastructure-related projects, it also includes amendments (effective from 1 January 2023) that increase reporting requirements regarding cryptocurrencies (effective from 1 January 2024).
In short, the law stipulates that digital assets (which are broadly defined) are considered cash. Therefore, digital asset transactions in excess of $ 10,000 must be reported on Form 8300. Failure to do so may result in possible criminal charges, up to five years in prison, and no financial cap for fines.
In addition, the law also advises that digital assets are certain securities, which are subject to reporting on Form 1099-B. This means that brokerage houses (any person who regularly provides a digital asset transfer service on behalf of another person) must report every cryptocurrency transaction they have enabled. For companies looking to adopt cryptocurrencies, these new requirements impose technological, logistical, and legal burdens that can be too expensive or too risky to be cost-effective. Therefore, while the EO signals a desire for U.S. global leadership in this economy, it is doing nothing to alleviate or remove potential barriers to widespread adoption.
Instead, the EO’s debate on the future of payments and money seems to focus more on the potential issuance of a digital currency by the central bank (CBDC) backed by the Federal Reserve. While the details of any potential CBDC will be crucial, the EO seems to recognize the need for a proactive approach to addressing the speed and interoperability of the U.S. payment system. The Treasury, the Fed, and the DOJ were given a task with various considerations regarding the adoption, legislation, and implementation of the CBDC. Some of the biggest issues include:
- Use CBDC as a real-time payment.
- To make the digital dollar interact with bitcoin and other cryptocurrencies.
- The relationship between digital and fiat assets.
- The structure and interoperability of the US CBDC with international partners based on the current reserve currency status of the US dollar.
Given the broader implications and international implications that the U.S. CBDC would have for the global financial system, any serious discussion is likely to require input from the private sector, foreign banks, and other stakeholders. While major questions remain, it is worth noting that the adoption of the CBDC by the United States could fundamentally change the role of both central and commercial banking.
Constant vigilance is required to comply with legal and regulatory risks
Ultimately, EO is a positive development for the Bitcoin industry. Prior to the issue, one of the main concerns was the possibility of attempting to enforce rules or restrictions in a prompt and random manner; it does not. Instead, EO opens the door to a constructive approach to thoughtful discourse and regulation by calling for a researched, calculated, and coordinated effort to address the nuances of a rapidly evolving industry.
However, while optimism in the Bitcoin industry regarding EO is appropriate, it should not hamper ongoing, committed efforts to meet current legal and regulatory requirements. For example, the DOJ recently gave explicit notice that its approach to cryptocurrency crime is evolving 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 will still need to demonstrate the implementation of compliance programs tailored to the unique risks in the Bitcoin ecosystem. This may include transaction tracking systems that would allow the detection of illegal activities and prioritization of consumer protection.
This is a guest post by Joseph Stafford. The opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc. or Bitcoin Magazine.