The early months of the Covid-19 pandemic saw growing interest in digital assets globally. In the second half of 2020, the U.S., European Union, and China have acted to expand the use of digital assets in their economies, each in its own way. This trend could further accelerate growth of digital asset usage around the world in 2021.
U.S. Administrative Actions
Federal financial regulators have been working collaboratively to issue guidance intended to clarify regulatory issues that have created problems for uses of digital assets.
In July, the Office of the Comptroller of the Currency (OCC) issued an interpretive letter stating that a national bank may provide cryptocurrency custody services for its customers. The letter reaffirmed that national banks may provide permissible banking services to any lawful business they choose, including cryptocurrency businesses, so long as they effectively manage the risks and comply with applicable law.
In September, the OCC and the Securities and Exchange Commission (SEC) acted in unison to address regulatory issues affecting stablecoins. The OCC issued another interpretive letter clarifying that national banks have authority to hold deposits that are fiat currency reserves for stablecoins. Difficulty finding banks willing to hold their U.S. dollar reserves has been a significant problem for some stablecoin projects, such as Tether. The SEC simultaneously issued a staff statement on the OCC’s interpretive letter, addressing related securities law issues and encouraging parties planning to structure and sell digital assets to contact the SEC’s FinHub.
The Department of Justice released a report in October clarifying that it intends not to take action against non-criminal uses of cryptocurrencies and other digital assets and is cooperating fully with the federal financial regulators. The report praised the potential economic benefits of cryptocurrencies and described an enforcement framework for punishing criminal uses of them, without interfering with legal uses or the decisions of U.S. regulatory authorities.
Even the Federal Reserve, which does not plan to adopt a central bank digital currency (CBDC), has acted to adapt to the impact of digital assets. The Fed is studying the concept of a digital dollar, although it has no current plans to implement one. However, in August, the Federal Reserve announced approval of the FedNow Service, a new interbank real-time gross settlement service that will support instant payments. The FedNow Service would offer benefits associated with digital assets without the use of a CBDC.
Conflict continues to exist between federal and state authorities on regulation of digital asset businesses, but the disagreement is over who will regulate them, not whether regulators should encourage their development. The OCC has attempted to offer a special-purpose national bank charter for payments companies since 2016. State authorities have contested the OCC’s authority to offer this charter, and in September, the Conference of State Bank Supervisors announced a program for uniform multi-state regulation of money transmitters. The federal and state initiatives represent different approaches to the same goal: a nationwide regulatory scheme for digital asset businesses that will encourage their growth.
European Union Actions
In September, the EU executive branch adopted a new union-wide strategy for making Europe competitive in the field of digital finance and proposed legislation to implement parts of that strategy.
The Digital Finance Strategy establishes four main priorities:
1. Remove fragmentation in a Digital Single Market for financial services,
2. Adapt the EU regulatory framework to facilitate digital innovation,
3. Create a European financial data space to promote data-driven innovation, and
4. Address new challenges and risks associated with the digital transformation.
The Retail Payments Strategy aims to create favorable conditions for the development of instant payments and EU-wide payment solutions and to lessen Europe’s dependency on global players.
The Digital Finance Package includes legislative proposals on regulation of markets in crypto-assets, including stablecoins; a pan-European blockchain regulatory sandbox; and a regulatory framework on digital operational resilience to prevent and mitigate cyber threats.
In October, the European Central Bank (ECB) released a report on a digital euro and announced a public consultation on the concept of a digital euro. The announcement stated that the ECB Governing Council intends to decide, toward the middle of 2021, whether to initiate a digital euro development project.
China has banned fundraising by digital asset sales (so-called ICOs) and restricted transactions in cryptocurrency, but the People’s Bank of China has been a leader in developing a CBDC. Referred to as DCEP, for digital currency/electronic payment, the project is developing a digital form of China’s fiat currency that would replace part of the country’s money supply. DCEP would be useful for making instant payments through banks or fintech firms, including China’s leading payment platforms, Alipay and WeChat Pay. A DCEP trial began in April and has expanded over the course of 2020.
Implementation of DCEP could have significant impacts on international finance. DCEP could become part of an effort by China to create an alternative to the international payments system, currently dominated by the U.S. dollar and the SWIFT system. Moreover, it would create a new source for data collection by the government of China, both within China and wherever transactions use DCEP abroad.
U.S. authorities already consider the international expansion of China’s leading fintech payment platforms, Alipay and WeChat Pay, to be a national security concern. China’s payment platforms have become so large in China and abroad that the parent company of Alipay, Ant Group, had planned the largest IPO in history until Chinese authorities canceled it in its final days in early November. DCEP would add another dimension to the problem, giving China’s surveillance state more direct access to data on transactions and people.
These 2020 initiatives in the U.S., EU, and China should accelerate the adoption of digital assets in each jurisdiction, each in its own way. The results will influence the development of domestic and international finance, affecting both economies and national security, in 2021 and beyond.
Access additional analyses from our Bloomberg Law 2021 series here, including pieces covering trends in Litigation, Transactions & Markets, the Future of the Legal Industry, and ESG.
Bloomberg Law subscribers can find related content on our Financial Technology resource.
If you’re reading this on the Bloomberg Terminal, please run BLAW OUT <GO> in order to access the hyperlinked content.