Biden’s White House shuts Congress out of its crypto policy framework

What happened

The Biden administration wants to implement a digital asset strategy to preserve the government’s ability to set monetary policy, regulate financial markets, ensure consumer protection and guard against illegal use of digital assets. Notably, much of this is being done without regard to legislative efforts in Congress focused on the industry, none of which are expected to pass this year.

This go-it-alone attitude is starting to rage on Capitol Hill. Rep. Pete Sessions (R-Tex.), a senior member of the House Financial Services Committee told an audience of crypto miners at an event in Round Rock, Texas, on Oct. 5, “…the White House is telling Congress that they are doing” We do not need to act on digital asset legislation at this time.” Manuel Ortiz, a Democratic strategist close to the White House and founder and president of the lobbying firm Vantage Knight, agreed with Sessions’ assessment of the administration’s position. “It was clear from the beginning that the tail was not going to wag the dog, that digital resource technology was not going to limit what the US government is required to do under the law.” According to Ortiz, the White House determined that the majority of the regulatory framework for digital assets was already covered by existing laws, and a strategy of allowing regulators to carry out enforcement actions would make the industry slow to follow the executive branch’s approach.

Key context

As crypto increasingly enters the public consciousness, regulators and lawmakers are trying to find the right way to monitor its development. There are currently over 70 bills before Congress that touch on crypto and blockchain, and none of them seem likely to pass before this legislative session is over. Meanwhile, the crypto market, which reached a market cap of over $3 trillion before falling below $1 trillion, has taken investors on a volatile ride.

In this climate, the White House has sought to coordinate interagency efforts following the March 9 release of Executive Order 14067 on the Responsible Development of Digital Assets. According to Ortiz, the White House, the Financial Services Oversight Committee (FSOC), the Treasury and the Federal Reserve were previously engaged in discussions about digital asset rules.

The White House strategy is to avoid conflict with industry, according to Ortiz, and instead slowly roll out policies via enforcement. The order broadly outlined six digital asset policy priorities, including consumer and investor protection; promoting financial stability; counter illegal financing; US leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation.

The release of a first federal digital asset framework on Sept. 16 detailed steps the administration would take to achieve the priorities. Brian Deese, National Economic Director, explains that “mandating agencies to do deep analysis of digital assets’ risks and opportunities by submitting policy recommendations, so we can build a framework that leverages the potential benefits while mitigating risks on a crucial manner.” With nine reports from various US agencies sent to the president, Deese says the White House saw “a clear framework for the responsible development of digital assets” that “paves the way for further action at home and abroad”.

Deese highlighted three White House priorities in a press briefing the day before the framework was released: the urgent push for research and development of a digital central bank currency (CBDC), combating harm to consumers and the environment, and the creation of a research and development agenda.

Most results were long on aspirations and short on suggested actions. That leaves regulatory action as the primary avenue for implementing the administration’s goals. The sanction issued by Treasury’s Office of Foreign Assets Control (OFAC) against Tornado Cash and the Commodities Futures Trading Commission’s (CFTC) action against Ooki DAO may represent this type of coordinated enforcement approach.

Key quote

“We recommend that agencies continue to strictly pursue their enforcement efforts focused on the crypto-asset sector. Agencies should use existing authorities to issue additional supervisory guidance and rules to address current and emerging risks,” Treasury Secretary Janet Yellen at a White House press conference on 15 .September.

Key figure

The interagency process to develop a US digital asset framework at the federal level consisted of at least 17 agencies required to participate and seven independent federal financial regulators encouraged to participate. Of those made publicly available, nine reports on digital assets totaling 505 pages were sent to the White House and 326 public comments were received by US agencies while the reports were being prepared.

Prospects and implications

The next steps for the administration include finding the right budgeting to meet the action items in the framework, according to Oritz. New funding is being proposed for traditional regulators such as the SEC to seek enforcement action. However, these funds are not yet earmarked for crypto.

At the same time, the SEC and CFTC are likely to continue their enforcement strategies to rein in the digital asset industry. The SEC has nearly doubled the size of its enforcement team. There have been some regulatory turf wars that are hard not to notice, especially as the SEC claims that the vast majority of digital assets are securities, while the CFTC is open to categorizing others as commodities, which would bring them under its mandate.

Legislation such as the Lummis-Gillibrand Responsible Financial Innovation Act (RFIA) and the Digital Commodities Consumer Protection Act of 2022 (DCCPA) are designed in part to help resolve the tension between the agencies. One limitation of the White House is that financial regulators traditionally maintain independence from the administration when it comes to regulation, enforcement and jurisdictional disputes.

Legislation can help to resolve the remaining political questions about digital assets that can help bring the industry under the administration’s framework. For example, the DCCPA continues to gain momentum in the Senate and largely gives this authority to the CFTC to regulate crypto spot markets. There also remains a need for a federal payment licensing regime for digital assets, which could be negotiated through a stablecoin bill recently discussed between Maxine Waters (D-Calif.), who chairs the House Financial Services Committee, and Patrick McHenry (RN.C. ), the panel’s ranking Republican.

A Republican sweep of both houses in next week’s election could slow things down at the SEC and CFTC, where each commissioner is nominated by President Joe Biden. The midterm election will have minimal impact on the state of cryptocurrency regulation, as both the cryptocurrency spot market bills and federal payments licenses are being sought on a bipartisan basis.

Decision points

The White House sought to establish an approach to digital assets without wanting to upset the crypto industry or rely on Congress for legislation. Having concluded that the vast majority of laws covering digital assets were already on the books, the administration’s policy has been to encourage an enforcement approach by regulators to bring the digital assets industry into line with current regulations.

With one of the actions of the White House being to encourage the SEC and CFTC to redouble their enforcement actions, regulators such as the SEC, CFTC and Treasury’s OFAC and the Financial Crimes Enforcement Network should be expected to continue issuing enforcement actions. In addition, potential new money could be earmarked for digital asset enforcement of these regulators. As enforcement actions continue, these should be viewed more as an overarching policy direction from FSOC regarding White House pressure to ensure it can set monetary policy, enforce the Bank Secrecy Act and other regulations in the financial markets, and reduce illegal use of digital. assets.

The administration’s approach limits the impact that pending legislation could have even if it moves forward. A change in the White House in 2024, rather than the results of the upcoming midterm elections, would be the next opportunity for major changes in US crypto policy.