The reports mandated by President Biden’s March executive order are here and seek to offer a comprehensive framework for the responsible development of digital assets (commonly known as cryptocurrencies). As noted early after the release, however, many of the items were left to be determined. But that doesn’t mean that the reports should be ignored. This series of blog posts will tease out some of the subtler points from each of the reports released on Friday.

Recommendations from the U.S. Department of the Treasury

The third report, “Implications for Consumers, Investors, and Businesses,” came from the U.S. Department of the Treasury. The Treasury was tasked with identifying how cryptocurrencies could impact financial markets, payment infrastructure, and economic growth in the United States, as well as making policy recommendations to protect Americans and support expanding access to safe financial services. (Section 5(b)(i) of Executive Order 14067). To that end, the report offered the following three high-level recommendations to regulators and law enforcement:

  1. Monitor the cryptocurrency market for unlawful activity, investigate wrongdoing, and enforce consumer, investor, and market protection laws.

  1. Publish supervisory guidance and rules.

  1. Ensure the public has access to trustworthy information on cryptocurrency.

Let’s consider some of these recommendations in more detail.

To monitor risks and hold criminals accountable, the Treasury recommended that agencies continue (and consider expanding) enforcement under applicable laws, work together on enforcement, and share information. When it comes to investigating and prosecuting cases of outright fraud, this is a relatively self-evident recommendation.

Complications arise if this recommendation is to be taken as the Treasury endorsing “regulation by enforcement” as a sound priority. For example, the report provides, “to the extent that trading, lending, borrowing, or other activity in crypto-assets involves securities or derivatives transactions, then these activities must be conducted in compliance with federal securities laws and the Commodity Exchange Act, including applicable regulations.” The words “to the extent that” are key here, as one of the major challenges facing cryptocurrency users and developers is the very lack of clear guidance on the application of existing laws to the crypto ecosystem.

On guidance and rules, the Treasury recognized that regulatory agencies have a role to play in “reducing uncertainty.” For that reason, its recommendation that agencies “take steps to clarify regulatory requirements applicable to crypto-asset products and services” should be taken by the Securities and Exchange Commission (SEC) as a message to move beyond insisting that those calling for formal guidance are simply missing the point.

Similarly, the report’s identification of “disclosure gaps” (i.e., that investors are not provided with relevant information) as a risk in the current crypto ecosystem should be taken by the SEC as a call to tailor legacy disclosure requirements to include information that is actually relevant to crypto token purchasers. The report’s concern that disclosures may lack “standardization” stands in contrast to SEC Chair Gensler’s calls for individual projects to “come in” and “talk” about bespoke compliance options.

In terms of examples of issuing guidance, the Treasury listed the Office of the Comptroller of the Currency’s (OCC’s) interpretive letters regarding cryptocurrencies, the Federal Deposit Insurance Corporation’s (FDIC’s) cease and desist letters regarding misleading statements, and the SEC’s statement on special purpose broker-dealers’ custody of digital assets as useful steps. The Treasury also recommended that guidance be written in “plain language” such that laypersons and non-professionals may understand it.

Finally, the report called for U.S. authorities, including the Financial Literacy and Education Commission (FLEC) to ensure Americans have access to trustworthy information about cryptocurrencies. Specifically, it seeks educational materials that highlight the risks of using cryptocurrency, identify common scams, provide information on how to submit complaints, and provide information on operational risks unique to the cryptocurrency ecosystem.

To this end, there are a few things that policymakers interested in providing such resources should consider. First, the information might appear more “trustworthy” if it’s not solely discussing the risks. Presumably, the person interested in learning about cryptocurrencies thinks there must be enough potential utility to invest time in reading up. So scare tactics may backfire. Risks should be disclosed, but so too should potential benefits. The report’s own enumeration of prospective benefits of crypto technologies—including improving efficiency in cross-border payments and remittances, moving towards real-time settlement, and increasing transparency of asset positions and liquidity (e.g., through fractionalization of assets)—might be a place to start. Notably, much of this information already is available from the private sector.

A Few Other Notes on the Report

To the Treasury’s credit, this report was one of the only reports to acknowledge the use of cryptocurrency as niche money—albeit with some skepticism as to current rates of adoption and implementation. Both “use as a medium of exchange for goods and services” and use as a “payment system” were listed as two of the four use case categories.

Lastly, Treasury seemed to be conflicted about the privacy implications of cryptocurrencies. On the one hand, this report and others are concerned with cryptocurrencies’ and smart contracts’ ability to obfuscate transactions when it comes to money laundering and illicit finance risk. On the other hand, the report is concerned that cryptocurrency transactions might not be private enough when it comes to improving Americans’ trust. The report noted, “it is possible to use data aggregation techniques to uncover users’ wallet addresses and track every transaction related to that wallet.” Regulators should recall this statement when bemoaning crypto technologies’ purported challenges to policing illicit finance.

Moreover, the Treasury made the important points that vulnerable communities in particular “are concerned about private or public entities having access to their information” and that “Americans in general are skeptical of commercial and government information collection.” Indeed. This too should be top of mind when policymakers consider taking steps to curtail digital and financial privacy and incentivize the use of centralized intermediaries, which, in the Treasury’s own words, “require an operator who sees that money’s movement on the ledger.”

Are you ready to learn about the next report? Click the links below to jump to another report.