What’s in the White House study on crypto policy and regulations?

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Recently, the White House released a document called the Comprehensive Framework for Responsible Development of Digital Assets. It summarizes Treasury Department studies of potential crypto policies and regulations. For what that could mean for federal regulators and the digital asset industry, Federal News Network’s Eric White spoke with Dennis Kelleher, co-founder and president of Better Markets, for Federal Drive with Tom Temin. Kelleher is also a former member of the Federal Reserve’s Banking and Securities Agency Review Team.

Dennis Kelleher: Well, digital assets is really a very broad and largely undefined category that encompasses all kinds of new economic so-called innovations from cryptocurrencies to stablecoins to digital dollars to blockchain; it runs the entire area. And that’s why they really required a whole of government approach to analyzing and thinking about the best way to regulate the many different areas that digital assets affect. And that’s why President Biden issued the executive order about six months ago. And that is why practically every part of the government undertook this rather broad and comprehensive review, which took about six months of intensive work. And, importantly, the bottom line was that some of these technologies have promise, but also many of them have parallels. And that is why sensible policy-making must proceed with caution. And that’s also why the executive order started with key priorities, including consumer and investor protection, protecting financial stability, countering illegal financing, and things like that. And because of that, frankly, we had Better Markets welcome the order and the reports that were just released — they just released nine reports in that review — because we think it got the priorities right. And it’s really a framework for analyzing the value, or I should say, determining whether there’s any value in any of these promises, while protecting consumers, investors, businesses, financial stability, national security, and the environment, everyone who might be To use. But all of which can be seriously threatened and compromised by these digital assets.

Eric White: It’s still pretty much the wild, wild west when it comes to digital currency. So the industry had to have known that at some point agencies were going to try to keep things under control. What do you think will be the reaction from the digital assets industry and its advocates, of which it has many?

Dennis Kelleher: Well, yeah, so I mean, you’re really onto something there, because the digital asset industry doesn’t just have independent cheerleaders; they have bought a really wide range of advocates from lobbyists and lawyers. In fact, they have used all the tentacles of the influence industry to try to hijack the public policy agenda regarding digital assets. That is one of the reasons why the executive order was really imperative, so that all parts of the government could be called together, and independently analyze the digital assets, of course with input from the industry, but also with all the other stakeholders. So I think the industry overall was relatively unhappy with the framework, primarily because it really prioritized protecting consumers, investors, financial stability, stopping money laundering and other illegal and criminal activities that are done with digital assets. However, I should say that when we say “the industry”, it’s a bit of a misnomer, because the digital assets industry is actually quite varied and complex. And so some parts of it, I would guess, were less unhappy than others. However, the primary outcome of the framework in the short term is to encourage regulators to use their existing powers to protect consumers, investors, financial stability, and prevent fraud, theft and the financing of things such as narco-terrorism, which is a major problem in some of these digital assets. And of course, as you know, the American people have already seen in the last 10 or so months the evaporation of about $2 trillion in crypto assets that have fallen from the high in November 2021 to the low, I think it was in August 2022 .And that is real money for many hardworking people who believed that many of these cryptoassets were valid worthwhile investments. They believed the representations made to them, and came to find that not only were these representations true, they were often not only inaccurate, but false and deliberately false. And now they find that they have either lost that money, or their money is in accounts that are frozen, or the companies they did business with are bankrupt, and their position in bankruptcy is very low, which is contrary to what they thought. And that’s why the executive order prioritizes protecting the American people, whether you’re a consumer or an investor, or frankly, a taxpayer who’s going to pick up the tab when financial stability is threatened by new innovative technologies like this.

Eric White: You are taking a look at this order. What do you think is the biggest issue upfront that financial agencies, regulatory agencies are concerned about? And which one do you think you’ll take the reins as the place to turn for help if you’re affected by one of these issues? Or if there’s a problem with criminals using it, there’s going to be one [Justice Department] centered effort? Or is it [Securities and Exchange Commission] Who really needs to step up to the plate here in your mind?

Dennis Kelleher: Well, it really is a whole of government approach. And the importance of the announcement and the nine reports, now to be implemented by the various agencies, is to ensure that the promise of these various assets is real and beneficial, and not just another wealth extraction mechanism with more dangers than they are worth. And it doesn’t just require studying and understanding the dangers carefully. It’s really a balancing act. Everyone hopes the promise is there. But in the meantime, the public policy priority has to be “show me,” and that’s really what the agencies are supposed to do. And then you have, for example, on investor and consumer protection, the executive order reports were really mandated – not mandated, I guess; encouraged again? Although I don’t even think it’s a word – but SEC, [Commodity Futures Trading Commission, Federal Trade Commission] and the DOJ is going to be at the forefront of investor and consumer protection. And they’re both going to be out there on the front end enforcement, but those are also the agencies that people can go to with complaints, as well as the CFPB, the Consumer Financial Protection Bureau. Now, the good news for the American people is that these agencies have been out every day fighting the crypto villains, of which there are far too many, as well as others who use digital assets for money laundering and other illegal activities, including, for example evasion of sanctions against rogue countries. So those agencies will be at the forefront there. The Fed, the banking agencies, along with the Treasury and the DOJ, will focus on broadly speaking, what they call illicit finance. But they will also promote better financial products. So for example, FedNow, which is a new system that the Fed is going to roll out, I think next year, that is going to enable faster check processing. And they are going to focus on expanding financial inclusion. If you now enter the arena of financial stability, then the Fed, the Treasury Department and others are going to look at the consequences for financial stability here. It is important to remember two things. Number one is that it’s pretty amazing that $2 trillion in wealth, unfortunately, literally evaporated in less than a year. But it had no consequences for financial stability. Now it’s really bad for investors who lost all their money. On the other hand, it is very good that it did not cause economic instability. And the reason for that is because until now regulators have been very good at making sure that the crypto industry was not connected and interconnected with the core of our banking system. So the focus on financial stability of the Fed, Treasury and others will continue to protect the banking and financial system to ensure that, as you said earlier, that kind of wild wild west, anything goes, financial predators run amok in crypto and other digital assets do not make room for the core of our banking and financial system. But it is also important to remember that there is a goal here to promote truly responsible innovation. But it has to be real and not a scam and not just people trying to sell pie in the sky that is going to make them rich and make everyone else poorer. And the announcement actually strikes this balance very well. So it talks about including the National Science Foundation, the Office of Science and Technology Policy and others who are going to be involved to make sure that the promises are real and there are benefits for the American people instead of just threats and wealth extraction.