The Situation: For the first time, the Economic Report of the President (the “Report”) includes a chapter on digital assets.
The Result: As a general matter, the Report takes a dim view of digital assets and their usefulness in the financial markets. This view is, however, at odds with the prevailing views in the market, where investors continue to back digital assets and their underlying technologies. In addition, the Report echoes SEC Chairman Gensler’s claim that most digital assets are securities and should be regulated as such.
Looking Ahead: The Report confirms that, for many digital assets companies in operation today, enforcement by the SEC or CFTC is likely a matter of when, not if, and such companies should prepare accordingly.
On March 20, 2023, the Biden administration released its 2023 Economic Report of the President (the “Report”). For the first time, the Report contained a chapter on Digital Assets, titled “Relearning Economic Principles.” The title is an apt summation of what follows, which seeks to systematically debunk the purported benefits and use cases for digital assets, to highlight the need for the digital assets industry to comply with the existing regulatory regime, and to tout the advantages of the Federal Reserve’s forthcoming FedNow real-time payments system, and a potential U.S. Central Bank Digital Currency (“CBDC”). Following are a few important takeaways.
First: the Report is highly skeptical of—and some might even say hostile to—the idea that digital assets, and even the underlying distributed ledger technology, have anything useful to offer to the global financial system. According to the Report, digital assets are not an alternative to fiat currencies because they cannot serve as a medium exchange, a unit of account, or a store of value. Furthermore, the Report asserts that digital assets have no “fundamental value,” and that digital asset valuations are instead driven primarily by “artificial scarcity.” Finally, the Report claims that once one removes anonymity from transactions (because the participants’ identities are required) existing technologies are better suited to the task.
Second: the Report emphatically demonstrates that the Biden administration is in lockstep with SEC Chairman Gensler’s view that most digital assets are securities, and existing regulations cover most of what is occurring in the digital asset space. As stated in the Report, “One of the principal areas where there is mass noncompliance is disclosure surrounding crypto assets that are securities. This lack of disclosure prevents investors from recognizing that most crypto assets have no fundamental value.” And, “Much of the activity in the crypto asset space is covered by existing regulations and regulators are expanding their capabilities to bring a large number of new entities under compliance.”
Third: the Report views the forthcoming FedNow program and a likely U.S. CBDC as sufficient to address the needs that the digital asset ecosystem purports to satisfy. In discussing the FedNow program, the Report quotes Federal Reserve Governor Michelle Bowman’s expectation that “FedNow addresses the issues that some have raised about the need for a CBDC.” And in discussing a U.S. CBDC, the Report observes that many countries that have rolled out a CBDC already have not built it on a distributed ledger network, but have instead chosen to rely on a trusted central authority. The Report predicts that, should a U.S. CBDC come to pass, it too will eschew a distributed ledger implementation.
The Report’s conclusions stand in stark contrast to prevailing views in the public regarding digital assets technology. Despite the onset of a so-called “Crypto Winter” last year, hundreds of millions of people around globe have continued to use digital assets and to spend their money on them. Thus, the market’s value assessments around digital assets are markedly different from those put forth in the Report. Furthermore, the Report appears to have a blind-spot with respect to the numerous studies supporting the use cases for digital assets in general, and to specific classes of digital assets that indisputably do have a fundamental value, such as digital bonds issued and settled using blockchain technology.
These disconnects aside, what does the Report mean for market participants in the digital assets space? Broadly speaking, the Report shows that digital assets companies can expect to continue to be the focus of an increasingly aggressive regulatory enforcement campaign. The Report removes any doubts about how the Biden Administration sees the space: a failed attempt at innovation within the financial sector that ultimately provides little, if anything, of value to the industry, and much in the way of undisclosed risk to the average investor / market participant. Consequently, for most digital asset companies currently in operation, an enforcement action from the SEC or CFTC would seem to be a matter of when, not if, and such companies should prepare accordingly.
In addition, the Report reinforces the importance of market participants engaging with elected representatives, and encouraging Congress to develop a statutory and regulatory framework that acknowledges digital assets’ potential value, while also addressing their potential risks. Several such proposals were put forth in the last Congress, but it remains to be seen what the current Congress has in store.
Three Key Takeaways
- The Report is highly skeptical of digital assets in general, and argues that compliance with the existing regulatory regime is needed to protect investors and market participants.
- The Report’s conclusions contrast with views in the marketplace, where millions of people continue to invest in and acquire digital assets, where issuers have completed digital bond issuances, and where studies extoll the potential benefits of digital assets.
- The Report adopts the position that much of what is occurring in the digital assets space is covered by existing regulations, and foretells a continued campaign of regulatory enforcement by the SEC and the CFTC.