// . //  Insights //  Compliance Implications Of White House Digital Assets Framework

Compliance burdens will increase sharply for digital asset service providers if the US Treasury’s recent recommendations are implemented. The collective government measures, announced in a series of published reports on September 16th follow the president’s Executive Order on “Ensuring Responsible Development of Digital Assets” from March. The reports are summarized in the White House Framework for Responsible Development of Digital Assets which touches on a broad range of topics in the development of digital assets and calls out the need for increased regulation including:

  1. Protecting consumers, investors, and businesses
  2. Potential federal regulation of nonbank payment providers
  3. Fighting illicit finance

The framework takes a strong stance on consumer protection “and encourage(s) regulators like the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), consistent with their mandates, to aggressively pursue investigations and enforcement actions against unlawful practices in the digital assets space.” This will likely lead to a significant increase in the number of actions against digital assets and companies providing digital asset services, particularly those that have been operating in a legal gray area while offering what looks like traditional banking services without regulatory oversight. It has become clear that a framework that outlines which digital assets constitute securities will require legislation.

It further calls for the Consumer Financial Protection Bureau (CFPB) and Federal Trade Commission to “redouble their efforts to monitor consumer complaints and to enforce against unfair, deceptive, or abusive practices”, i.e., looking for companies who are violating UDDAP. As a result, Companies participating in digital assets are likely to face increased scrutiny on their marketing efforts and the way they handle consumer complaints. This has already been seen in recent weeks with the recent cease and desist orders issued by the FDIC against FTX US and Voyager Digital among others saying they were misleading consumers about their funds being backed by FDIC insurance.

The framework recognizes the need to provide better consumer education on the risks involved with digital assets and has tasked the Financial Literacy Education Commission with leading the effort to educate consumers on the risks, identify common fraudulent practices, and learn how to report misconduct.

As part of a subsection on promoting access to safe, affordable financial services, the framework references that the Biden admin will consider recommendations on creating a framework to regulate nonbank payment providers at the federal level, where currently regulation of these providers is primarily done at the state level. If implemented, federal regulation would lead to additional regulatory obligations for firms offering these services.

Fighting illicit finance is a major subsection of the framework and details a potential significant increase in legal responsibility of digital assets firms in preventing illicit finance. The Biden administration is evaluating whether to ask Congress to amend the Bank Secrecy Act, anti-tip-off statues, and laws against unlicensed money transmitting to apply explicitly to digital assets, which if implemented would be a significant increase in the compliance responsibilities of digital assets companies. This would decrease the gap between the compliance obligations of traditional financial services institutions and new entrants operating in the digital assets space.

The framework is a major step forward in the United States clarifying its intentions toward digital assets, a critical necessity for fostering innovation in the space. While it does not fully address some critical outstanding questions from the digital assets industry, which will likely require dedicated rulemaking, or outline a more detailed roadmap for oversight, the framework emphasizes how the administration sees enforcement playing a major role going forward. At the same time, the framework reaffirms the United States commitment to integrating digital assets into the traditional financial system, which also comes with significant expected increases in the compliance obligations for digital assets. It is now more important than ever for firms engaging in digital assets or looking to engage in digital assets to develop a comprehensive strategy to manage their compliance obligations, in turn, serving the consumers who continue to adopt.