The Breakdown - White House ‘Comprehensive Framework for Responsible Development of Digital Assets’ Is Neither Comprehensive nor a Framework

Episode Date: September 17, 2022

This episode is sponsored by Nexo.io, Chainalysis and FTX US.   On today’s episode, NLW looks at a set of three reports around crypto out of the Treasury Department as well as examines the White House’s just-released framework for digital assets. He argues there are big, important questions that remain unaddressed. - Nexo is a security-first platform where you can buy, exchange and borrow against your crypto. The company ensures the safety of your funds by employing five key fundamentals including real-time auditing and recently increased $775 million insurance on custodial assets. Learn more at nexo.io. - Chainalysis is the blockchain data platform. We provide data, software, services and research to government agencies, exchanges, financial institutions and insurance and cybersecurity companies. Our data powers investigation, compliance and market intelligence software that has been used to solve some of the world’s most high-profile criminal cases. For more information, visit www.chainalysis.com. - FTX US is the safe, regulated way to buy Bitcoin, ETH, SOL and other digital assets. Trade crypto with up to 85% lower fees than top competitors and trade ETH and SOL NFTs with no gas fees and subsidized gas on withdrawals. Sign up at FTX.US today. - I.D.E.A.S. 2022 by CoinDesk facilitates capital flow and market growth by connecting the digital economy with traditional finance through the presenter’s mainstage, capital allocation meeting rooms and sponsor expo floor. Use code BREAKDOWN20 for 20% off the General Pass. Learn more and register at coindesk.com/ideas. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsors today is “Razor Red” by Sam Barsh and “The Life We Had” by Moments. Image credit: narvikk/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.com, and FTCS, and produced and distributed by CoinDesk. What's going on, guys? It is Friday, September 16th, and today we are talking about the White House's comprehensive framework for responsible development of digital assets, which I believe is neither comprehensive nor a framework. but we'll get into that. First, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Also a disclosure, as always, in addition to them being a sponsor of the show,

I also work with FTX. All right, well, listen, talk about ending the week with a bang. The White House this morning dropped what they titled, A Comprehensive Framework for Responsible Development of Digital Assets. The Treasury Department also released three reports relating to crypto and digital assets. So today what we're going to do is look at these documents and see if we can make sense of where they leave us from a regulatory perspective. All of this obviously comes as a follow-up to the Biden executive order on digital assets that came in March. We're now seeing the result of the six months of intervening study and research. So as I mentioned, the U.S. Department of the Treasury published three reports

today. One was on the future of money and payments. One was on implications for consumers, investors, and businesses. And one was an action plan to address illicit financing risks of digital assets. The summary quote across all three was, innovation is one of the hallmarks of a vibrant financial system and economy. But as we have learned painfully from the past, innovation without appropriately addressing the impact of these developments can result in significant disruptions and harm to the financial system in individuals, especially our more vulnerable populations. The reports clearly identify the real challenges and risks of digital assets used for financial services. At the same time, if these risks are mitigated, digital assets and other emerging technologies could offer significant

opportunities. These reports and their recommendations provide a strong foundation for policymakers as we work to realize the potential benefits of digital assets and to mitigate and minimize the risks. And even right here in this, you get the theme that has been the case ever since the executive order came out. There are opportunities and risks. We have to work to minimize the risks to take advantage of the opportunities. And by the way, I don't make light of that because it's wrong, just that it's such a standard government parlance. Anyway, the first report, the future of money and payments was about 50 pages broken into four main sections, money and payments, which was sort of a background, potential U.S. Central Bank digital currency design choices, policy considerations and recommendations.

Now, there's obviously a lot in here, but something I want to hone in on is the geopolitical piece. The report spends significant time in the policy considerations section, thinking about how a U.S. CBDC fits in with a dollar regime around the world. Consideration to supporting U.S. global financial leadership. Some observers have suggested that a U.S. CBDC is needed to preserve U.S. global financial leadership, and the role of the dollar because of the potential efficiencies created by foreign CBDCs will create competition for the dollar undermining its global use. However, the prominence of the dollar reflects factors beyond payment system efficiency. These factors include the United States strong economic performance, sound macroeconomic policies and institutions,

open deep in liquid financial markets, institutional transparency, commitment to a free-floating currency, and strong and predictable legal systems. In the near-term foreign CBDCs and private digital assets by themselves likely offer little new competition to the dollar, beyond traditional foreign fiat currency, particularly because they do not address the structural factors above. So basically, this is an articulation of what many folks have assumed, which is that the U.S. is not necessarily in a rush for a CBDC because it doesn't really believe the argument that somehow China just slapping some new features on their digital yuan is going to make markets actually care about it over the dollar. The U.S.'s current leadership role as having the world's reserve currency means that it has the

privilege it feels of slow walking the question of a CBDC. Now, a bigger consideration from a geopolitical perspective is sanctions. The report writes, fundamentally, the effectiveness of U.S. sanctions relies on the central role of the U.S. dollar in U.S. global financial services and leadership. As previously stated, neither foreign CBDCs nor private sector issued digital assets are likely to have a significant impact on either of these factors in the near term. Over time, however, it is possible that a U.S. CBDC could help to maintain U.S. leadership in the international financial system and thereby contribute to preserving

the effectiveness of sanctions and other financial measures to address threats to national security, foreign policy, and economy of the United States. Finally, as relates to CBDCs, the report speaks to privacy. Quote, to promote privacy and human rights globally and to aid and adoption, CBDC should prioritize privacy and minimize the amount of transaction and personally identifiable information collected by the central bank. Along with design considerations, a CBDC system should have a governance structure that applies to both the central bank and intermediaries. That includes consumer protections to prevent the disclosure of consumer financial information and protect the user from undue government scrutiny. Now, ultimately, this is the type of language that we're

seeing a lot around a U.S. CBDC. It's certainly what you hear when, for example, Fed Chair Jerome Powell is asked about it. Unfortunately, most people's concerns as relates to privacy issues with the CBDC isn't good intentions. It's what information actually is available. So ultimately, should the U.S. proceed with the CBDC, there will be both a principal conversation, but also just a practical how the thing is designed. Ultimately, the report makes four recommendations. Recommendation 1. Advance work on a possible U.S. CBDC. In case one is determined to be in the national interest. Recommendation 2. Encourage use of instant payment systems to support a more competitive, efficient, and inclusive U.S. payment landscape. Recommendation 3 establish a federal framework for payments regulation to protect users in the financial system while supporting responsible innovations in payments.

Recommendation 4 prioritize efforts to improve cross-border payments, both to enhance payment system efficiency and protect national security. Now, these recommendations bring up one of the biggest questions to me. Who is doing the determining of whether a CBDC is in the national interest when everything hangs on that question? CoinDesk asked this as well. They write, Who decides within the national interest? That's not so clear. The Fed will have a definite say because the central bank would be responsible for managing it. It may further require a decree from the administration and Congress may also have to get involved. The answer could be steered by a future legal interpretation from the Justice Department, which is expected to outline the authorities the Federal Reserve needs before it can issue a digital dollar.

A senior administration official told CoinDesk that, in practical terms, the answer is all of the above. The Fed is independent, but will collaborate on an answer with lawmakers, the administration, and other federal agencies to decide the national interest. Now, the interesting thing about this is that Fed Chair Powell has made it clear that he does not want, nor does he believe the Federal Reserve has the authority to just decide to do a CBDC. C. NXO is a security-first platform built for the long run with everything you need for your crypto. Five key fundamentals, including real-time auditing and insurance on custodial assets, safeguard your funds, making NXO the right place for you to buy, exchange, and borrow against your assets safely.

Learn more about NXO's reliable business model and start your crypto journey at nexo.io. That's N-X-O-X-I-O. Eager to make more informed decisions around crypto, chainalysis is here to help. Chainalysis demystifies cryptocurrency by providing industry-leading compliance, market intelligence, and investigations support for all crypto assets. For organizations like Gemini, Crypto.com, and BlockFi. Gain unparalleled visibility and maximize your potential with the leading blockchain data platform by visiting us now at Chainalysis.com slash CoinDesk.

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and use referral code breakdown to support the show. Next up, Report 2. Crypto assets, implications for consumers, investors, and businesses. This is really a primer-type document, but gives a sense of how they're thinking about the industry after study. It's basically just an expanded articulation of this opportunity plus risk thing I was calling out before. So given that, let's just skip ahead to their recommendations. Recommendation 1.

US regulatory and law enforcement agencies should, as appropriate, vigilantly monitor the crypto asset sector for unlawful activity, aggressively pursue investigations, and continue to bring civil and criminal actions to enforce applicable laws with a particular focus on consumer, investor, and market protection. Frauds, thefts, and scams have emerged as an especially grave area of concern in crypto assets, with estimates of claimed losses reaching billions of dollars in causing material harm to U.S. consumers, investors, and businesses. Recommendation 2. U.S. regulatory agencies should continue using their existing authorities to issue supervisory guidance and rules as needed to address current and emerging risks in

crypto asset products and services for consumers, investors, and businesses. Many U.S. regulatory agencies have already issued guidance or statements related to market participants within their respective jurisdictions. Such actions benefit consumers and investors of crypto assets and entities offering crypto asset products and services by reducing uncertainty for business operations and raising conduct standards to facilitate responsible innovation. The regulator should also review existing regulations and take appropriate steps to address one, consumer and investor confusion regarding the regulation of crypto asset products and services, and two, gaps and disclosures by market participants promoting crypto asset products or services

and operational and technical obligations of crypto asset intermediaries. Recommendation three, U.S. authorities should work individually and through the Financial Literacy and Education Commission, FLEC, as appropriate, to ensure that U.S. consumers, investors, and businesses have access to trustworthy information on crypto assets. We'll talk about in just a minute the bone that this report, I think, throw to the industry. Finally, Report 3 is an action plan to address illicit financing risks of digital assets. It discusses the risks that they see, money laundering, proliferation financing, and terrorist financing, and then gives seven priority actions. One, monitoring emerging risks.

Two, improving global AML-CFT regulation and enforcement. Three, updating BSA regulations. Four, strengthening U.S. AML-CFT supervision of virtual asset activities. Five, holding accountable cybercriminals and other illicit actors, six engaging with the private sector, and seven supporting U.S. leadership and financial and payments technology. Summing all of this up, it's kind of what you'd expect from the Treasury. They stick within this framework of responsible innovation that was set out by the White House. They call for a lot more enforcement action. And that dogbone that I was saying that they threw to the industry was that, as the block put it, quote, Treasury also wants regulators to provide additional guidance for digital asset developers

and other companies involved in cryptocurrencies so that they better understand how to follow existing rules. In theory, that clarity should also reduce the need for future enforcements. One senior treasury officials said, one of the recommendations is that regulators will issue new rules and guidance. That's a recognition that we see work needed in this space. This is sort of a direct contravening, of course, of folks like Gary Gensler at the SEC, who has effectively said that new specific regulations are not needed and that all the guidance that the crypto industry needs is already available. It's also worth noting that the Treasury Department was intentional about avoiding specific legislative proposals,

noting that multiple bills have been introduced, and that they were committed to, quote, working with the Hill closely to ensure that we're working arm in arm. So let's then talk about the White House report. The report starts, over the last six months, agencies across the government have worked together to develop frameworks and policy recommendations that advanced six key priorities identified in the executive order. The nine reports submitted to the president to date, consistent with the EO's deadlines, reflect the input and expertise of diverse stakeholders. Together, they articulate a clear framework for responsible digital asset development and pave

the way for further action at home and abroad. We shall see. So what's clear from the summary fact sheet is that enforcement is top of mind. The first section encourages regulators to, quote, aggressively pursue investigations and enforcement actions against unlawful practices. They suggest a redoubling of efforts to monitor consumer complaints and enforce against unfair, deceptive, or abusive practices. They instruct bodies to lead public awareness efforts to help consumers understand the risks involved with digital assets.

Keep in mind, this is the first section in this summary report. Next up, they talk about how they can make this technology useful for everyone. One of the bullets is that the, quote, National Science Foundation will back research and socio-technical disciplines and behavioral economics to ensure that digital asset ecosystems are designed to be usable, inclusive, equitable, and accessible by all. Just off his run for Senate in New Hampshire, Bruce Fenton had a field day with that bullet. He writes, Fear Not Plex, the Fiat-funded

scientists who brought us such hits as the Food Pyramid and, two weeks to flatten the curve, are here to tell us how to make a more inclusive blockchain. When it comes to financial stability, this summary has a bunch of bullets, but they don't really say anything. Quote, the Treasury will work with financial institutions to bolster their capacity

to identify and mitigate cyber vulnerabilities. Okay? They will also work with other agencies to identify, track, and analyze emerging strategic risks. Again, okay. When it comes to a advancing responsible innovation. There are a series of recommendations, including that, quote, the Department of Energy, the Environmental Protection Agency, and other agencies will consider further tracking digital assets environmental impacts, developing performance standards as appropriate,

and providing local authorities with the tools, resources, and expertise to mitigate environmental harms. Powering crypto assets can take a large amount of electricity, which can emit greenhouse gases, strain electricity grids, and harm some local communities with noise and water pollution. Opportunities exist to align the development of digital assets with transitioning to a net zero emissions economy and improving environmental justice. That's about the extent of what it says on that particular factor. They have a whole section as well on reinforcing global leadership, and I think the thing that stands out so much is that it takes the view that it is the government of the United States that is the leader versus the private sector and individual citizens.

So, for example, the section is not talking about making the U.S. a beacon for companies and entrepreneurs to flock to build digital assets in the U.S. and then bring that technology elsewhere. It's talking about things like, quote, leveraging U.S. positions in international organizations to message U.S. values related to digital assets, or to, quote, increase collaboration with and assistance to partner agencies in foreign countries. I don't think this is particularly surprising that the government sees global leadership through the lens of government, but it is really notable how an industry that has developed for the last 12 or 13 years is now in the eyes of the U.S. government to be exported to the rest of the world through the U.S. government. A final section is

fighting illicit finance, and unsurprisingly, it's much more comprehensive than the rest. So, listen, this report could have been much, much worse. It could have been some silly draconian things. It could have been unthought-out rulemaking. It could have been, in a word, bad. And it's not. My TLDR is just that in no way does it represent a clear framework. It doesn't actually address any of the thorny questions. It doesn't deal with the question of whether tokens are securities or commodities. It makes no recommendations on which bodies are supposed to actually have statutory authority over different parts of the industry, instead just articulating the roles that each can play. It doesn't answer questions like who determines whether a CBDC is in the national interest.

It is effectively just hundreds of pages to reiterate that these technologies could be good, but they could also be bad, and there are lots of relevant government bodies that should be involved. In that way, it's not bad. It's just disappointing for not having actually tackled head on the really tricky stuff. Now, the good news is that that has me more convinced than ever that it has to be Congress. It has to be, in other words, elected rather than appointed officials who make the determination of how such an important growth industry in America is actually going to be regulated and supported. Anyways, guys, we are in the thick of it now, and it's just going to get more exciting from here. I want to say thanks again to my sponsors, nexus.com, chain analysis and FTX, and thanks to you guys for listening.

Until tomorrow, be safe and take care of each other. Peace. I want to tell you about CoinDesk's new event, the investing in digital enterprises and asset summit or ideas. The event facilitates capital flow and market growth by connecting the digital economy with traditional finance. Join CoinDesk October 18th and 19th in New York City for a 360-degree investment experience, where you can source, invest, and secure the next big deal in digital assets. Use code Breakdown 20 for 20% off a general pass. You can register today at coindex.com slash ideas.