Strengthening American Leadership in Digital Financial Technology – The White House

  • Source: www.whitehouse.gov

Treliant Takeaway

The Trump Administration moved quickly in its first week in office to pave the way for greater regulatory clarity (and likely growth) for the digital assets industry. Importantly, the EO underscored the importance of the industry’s role in innovation and economic development in the U.S. Of note:

  • President Trump signed an Executive Order (EO) in January 2023 setting forth actions to enable growth of the industry in the U.S.
  • The SEC repealed Staff Accounting Bulletin No. 121 (SAB 121), a requirement that limited the ability of traditional financial institutions to provide custody and other crypto services.
  • The SEC set up a crypto task force led by SEC Commissioner Hester Peirce, dubbed the “Crypto Mom” by those in industry.
  • The House Committee on Oversight and Government reform sent a letter to several crypto CEOs to understand their institution’s experience with de-banking.

The EO represents a pivotal and positive shift in the federal government’s stance towards the digital asset industry and paves the way for the establishment of a tailored regulatory framework and the entry of new players/growth of existing ones.

Treliant can help with the development of mature regulatory compliance and risk frameworks; regulatory and operational due diligence of a prospective crypto client; enhancements to financial crimes and third-party risk management compliance programs; and establishment or refinement of a new products committee to reflect the nuances of crypto clients and products, to name a few areas that we have supported in the recent past.

Highlights

The EO stated clearly that the Administration’s policy will be to:

  • Support the responsible growth and use of digital assets, blockchain technology, and related technologies.
  • Protect and promote individual and institutional access to the sector.
  • Protect the sovereignty of the U.S. dollar.
  • Protect and promote “fair and open” access to banking.
  • Provide regulatory clarity and certainty via technology neutral regulatory frameworks.

Notably, the EO prohibited the establishment of a Central Bank Digital Currency (CBDC) (i.e., issuance of a CBDC by the Federal Reserve and revoked the Biden Administration’s EO 14067 and Treasury Departments 2022 “Framework for International Engagement on Digital Assets,” including all associated policies and guidance.

The EO tasked the Treasury Secretary with implementation of the Order and established a Presidential Working Group on Digital Asset Markets (Working Group) within the National Economics Council’s working group. Notably this Working Group does not include the Federal Banking Agencies but includes the SEC and CFTC.

The EO underscored the President’s focus on moving quickly to provide the industry with much needed clarity by setting deadlines for the Working Group to:

  • Identify existing regulations (30 days);
  • Submit recommendations (60 days); and
  • Provide a report with recommendations for a suitable regulatory framework for the industry (180 days).

SEC Actions

In addition, and perhaps as critical, the SEC repealed Staff Accounting Bulletin No. 121 (SAB 121), a requirement that limited the ability of traditional financial institutions to provide custody and other crypto services. SAB 121 had served as a serious deterrent to regulated financial institutions’ ability to be serious blockchain market players by requiring them to record digital assets held for clients as liabilities on their balance sheet, to be matched by capital.

The SEC also established its own crypto task force under Acting Chair Mark Uyeda and led by Commissioner Hester Peirce, both vocal advocates for the industry.

Congressional Involvement

The House Committee on Oversight and Government reform sent a letter to several crypto CEOs to understand their institution’s experience with de-banking.  Lack of access to banking services for crypto industry participants, known as “Operational Chokehold 2.0” has been a significant roadblock to growth.

What Does This Mean for the Industry?

The Administration has made it clear it wants to move quickly and collaboratively with government agencies and the industry to enable the safe growth of the digital assets industry in the U.S. With the priorities laid out on the EO and establishment of the two working groups, the industry should expect regulatory clarity and closer engagement between the government and industry stakeholders (crypto and traditional financial services firms). Stakeholders with a vested interest should prepare for rapid and constructive dialogue with the Administration, including appropriate risk and compliance guardrails.

The repeal of SAB 121 should pave the way for traditional financial service firms to provide custody and other crypto services for its clients. This may entail building in-house technology or the acquisition of existing custody players.

Finally, crypto industry participants should expect greater access to banking services. This will require that they be able to clearly articulate their risk and compliance controls, particularly around BSA/AML, cybersecurity, and other safety and soundness considerations such as capital, liquidity, market risks, etc.

For their part, regulated financial institutions should be prepared to conduct targeted and enhanced due diligence on crypto firm applications to ensure appropriate compliance and risk management protocols are in place. Third-party risk, risk and control self-assessments, and “New Products” committees should be updated to reflect new variations on old risks.

Treliant can help by:

  • Conducting a gap assessment of a digital asset firm’s compliance programs.
  • Enhancing a compliance program (core, AML, cyber, consumer).
  • Preparation for due diligence efforts to be conducted by regulated financial institutions.
  • Development of engagement strategy and talking points.

Author

Mike Scarpa

Mike Scarpa is a Managing Director in Treliant’s Regulatory Compliance, Mortgage, and Operations Solutions practice. He helps set Treliant’s regulatory compliance/operations agenda, including key trends, solution offerings, and client pursuits. He also executes on regulatory compliance projects and serves as a subject matter expert.