US Treasury Seeks Comments on Digital Assets

The public now has a valuable opportunity to aid in the efforts of the Treasury Department and other federal agencies to gather comprehensive data regarding the conditions that would drive mass adoption of digital assets and the risks and benefits such growth might present to the U.S. consumers, investors, and businesses.

The Treasury requesting comments from the public pursuant to Executive Order 14067 (the Order), "Ensuring Responsible Development of Digital Assets", which outlines principal U.S. policy objectives concerning digital assets: consumer protection, U.S. and global financial stability, mitigation of illegal activity, reinforcement of U.S. leadership in global financial system and competitiveness, access to safe and affordable financial services, and support of technological advances.

Among other directives, the Order instructs the Secretary of the Treasury, the Secretary of Labor, and the heads of other relevant agencies (the Securities and Exchange Commission, the Commodity Futures Trading Commission, among others), to work together to create a report for the President on the implications of development and adoption of digital assets and changes in financial market and payment system infrastructures for U.S. consumers, investors, businesses and for equitable economic growth. The Treasury is using this request for comment to gather data and recommendations to inform their Section (5)(b)(i) report.

In particular, the Treasury requests comments in five categories:

• Adoption to Date and Mass Adoption – data on current adoption of digital assets and factors that could lead to large-scale adoption – for example, use and acceptance of cryptocurrencies as a common and regular payment method for goods and services
• Opportunities for Consumers, investors, and Businesses – data and specific use cases highlighting the pros and cons of various digital asset opportunities, both in use and prospective
• General Risks in Digital Assets Financial markets – risks arising from current market conditions and potential mitigating factors, including market transparency, data accuracy, technological risk and jurisdictional and legal conditions
• Risks to Consumers, Investors and Businesses – risks that arise through engagement with digital assets, including frauds, theft, failure/insolvency of wallets, custodians or other intermediaries, among others
•  Impact on the Most Vulnerable – ways in which digital assets can benefit, or pose risks to, the underserved and the most vulnerable

Recent events have certainly highlighted many of the risks presented by digital assets, indicating a particularly turbulent moment in the digital asset world. Valuations for cryptocurrencies and digital asset businesses catapulted in 2021 before crashing back down to earth in 2022. Cryptocurrency lending platforms Celsius and Voyager have entered Bankruptcy proceedings with the fate of their customer's cryptocurrencies still undetermined.

The U.S. legal conditions for digital assets are undergoing a (perhaps slow) transformation. One of the bedrocks of American commercial law jurisprudence, the Uniform Commercial Code, is expected to be amended with a view to accommodating emerged and emerging technological developments such as digital assets. The joint committee of the American Law Institute and the Uniform Law Commission have recently recommended a draft of such amendments. The SEC, the CFTC, banking regulators and other regulatory agencies have made statements or initiated enforcement proceedings to assert regulatory authorities over digital assets. Bills have been introduced in the Senate to define those regulatory authorities, though the legislative process will be long and the outcome uncertain.

By contrast, other jurisdictions have leaped ahead of the U.S. in terms of legal and regulatory framework for digital assets. The European Union has recently finalised a ground-breaking regulatory framework, the Markets in Cryptoassets Regulation, designed to classify all forms of digital assets for regulatory purposes and including associated disclosure and regulatory frameworks for both the issuance of and intermediation in all forms of cryptoassets.

Moreover, the European Union has recently adopted a measure that is designed to facilitate transformation in traditional financial markets through the establishment of purposely-designed market infrastructure entities handling securities issued on distributed ledger networks. These can be either trading venues and/or securities settlement systems which will benefit from significant dispensation from currently applicable rules to entities of the same type handling conventional securities business. Certain European countries most notably France, Germany and Luxembourg have in recent years extended their dematerialised securities legislation to certain forms of distributed ledger based securities such that these can be issued entirely on distributed ledger networks.

In England, the Law Commission, the body entrusted with law reform, has last week issued a milestone consultation paper laid over more than 540 pages with significant proposal to amend the law to facilitate the recognition and mainstream adoption and deployment of digital assets .

It goes without saying that global consistency in classifying and regulating digital assets is critical. This is both to avoid arbitrage opportunities and loopholes in certain markets and equally important to enable distributed ledger technology to traverse borders and achieve its undoubted huge potential in transforming the world's financial markets.

With the Treasury's request for comment, the public has a valuable opportunity to aid the Treasury and other federal agencies' efforts in understanding the benefits and the now infamous risks of the development and adoption of digital assets, which would inform their potential approaches to digital assets and markets, and influence the contours of what may become part of a comprehensive policy, legal and regulatory infrastructure in which digital assets will operate in the U.S.

Authors: Julia Lu (Partner); Etay Katz (Partner); Yanni Thanopoulos (Summer Clerk)