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Recently, the White House released a document called the Comprehensive Framework for Responsible Development of Digital Assets. It summarizes Treasury Department studies of potential crypto policies and regulations. For what it could mean for federal regulators and the digital asset industry, Federal News Network’s Eric White spoke to Dennis Kelleher, co-founder and president of Better Markets, for the Federal Drive with Tom Temin. Kelleher is also a former member of the Federal Reserve’s Banking and Securities Agency Review Team.

Dennis Kelleher: Well, digital assets is really a very broad and largely undefined category encompassing all sorts of new novel, financial so-called innovations from cryptocurrencies to stable coins to digital dollars to blockchain; it runs the entire range. And that’s why they really required a whole of government approach to analyzing and thinking about the best way to regulate the many different areas that digital assets impact. And that’s why President Biden issued the executive order about six months ago. And that’s why virtually all parts of the government undertook this pretty broad and comprehensive review, which took about six months of intensive work. And, importantly, the baseline was that some of these technologies have promise, but also lots of them have parallel. And that’s why sensible policymaking has to proceed with caution. And that’s also why the executive order started with key priorities, including consumer and investor protection, protecting financial stability, countering illicit finance, and things like that. And because of that, frankly, we had Better Markets welcome the executive order, and the reports that were just released — they just issued nine reports in connection with that review — because we believe that got the priorities right. And it’s really a framework for analyzing the value, or I should say, determining if there is any value in some of these promises, while at the same time protecting consumers, investors, businesses, financial stability, national security and the environment, all of which could benefit. But all of which could be seriously seriously threatened and compromised by these digital assets.

Eric White: It still is pretty much the wild, wild west when it comes to digital currency. So the industry had to have known that at some point, agencies were going to try and keep things under control a little bit. What do you think will be the reaction from the digital assets industry and its advocates, which it has many?

Dennis Kelleher: Well, yeah, so I mean, you really put your finger on something there, because the digital asset industry doesn’t just have independent cheerleaders; they have purchased really a wide variety of advocates from lobbyists and lawyers. In fact, they’ve used all the tentacles of the influence industry to try and hijack the public policy agenda regarding digital assets. It’s one of the reasons the executive order was really imperative, so that all the parts of the government could be convened, and independently analyze the digital assets, obviously, with the input of the industry, but also with all the other stakeholders. And so I think the industry overall was relatively unhappy with the framework, primarily because it really prioritized protecting consumers, investors, financial stability, stopping money laundering and other illegal and criminal activities that are being done with digital assets. I should say, however, when we say “the industry,” it’s a little bit misleading, because the digital asset industry really is quite varied and complex. And so some parts of it, I would guess, were less unhappy than others. But the primary outcome of the framework in the short term, however, is to urge regulators to use their existing authorities to protect consumers, investors, financial stability, and prevent fraud, theft and financing things like narcoterrorism, which is a major problem in some of these digital assets. And of course, as you know, the American people have already seen over just the last 10 or so months the vaporization of about $2 trillion in crypto assets that have declined from a high in November of 2021 to a low, I think it was in August of 2022. And that’s real money to a lot of real hard working people who thought that many of these crypto assets were valid worthwhile investments. They believed the representations that were made to them, and come to find out not only weren’t those representations true, they were often not just inaccurate, but false and knowingly false. And now they find themselves, either having lost that money, or their money is in accounts that are frozen, or the companies that they dealt with are in bankruptcy, and their standing in bankruptcy is very low, all of which is contrary to what they thought. And that’s why the executive order prioritizes protecting the American people, whether you’re a consumer or an investor, or frankly, a taxpayer who’s going to pick up the bill when financial stability is threatened by new innovative technologies like this.

Eric White: You’re taking a look at this executive order. What do you think is the biggest issue up front that financial agencies, regulation agencies are concerned about? And which one of them do you think will kind of take the reins as the place to go for help if you’re affected by one of those issues? Or if there is a problem with criminals using it, is it going to be a [Justice Department] centered effort? Or is it the [Securities and Exchange Commission] that really needs to step up to the plate here in your mind?

Dennis Kelleher: Well, it is a really a whole of government approach. And the importance of the executive order and the nine reports, which will now get implemented by the various agencies, is to make sure that the promise of these various assets is real and beneficial, and not just a new wealth extraction mechanism with more dangers than they’re worth. And that requires not just carefully studying and understanding the perils. It’s really a balancing act. Everybody hopes the promise is there. But in the meantime, the prioritization for public policy has to be “show me,” and that’s really what the agencies are going to undertake. And so you have, for example, on investor and consumer protection, the executive order reports really mandated — didn’t mandate, I guess; re-encouraged? Though I don’t even think that’s a word — but the SEC, [Commodity Futures Trading Commission, Federal Trade Commission] and DOJ are going to be in the forefront on investor and consumer protection. And they’re both going to be out there on front end enforcement, but those are also the agencies that people can go to with complaints, as well as the CFPB, the Consumer Financial Protection Bureau. Now, the good news for the American people is that those agencies have been out front every day fighting the crypto crooks, of which there are far far too many, as well as others using digital assets for money laundering and other illegal activities, including, for example, evading sanctions on rogue countries. So those agencies will be in the front there. The Fed, the banking agencies, along with Treasury and DOJ, will focus on broadly speaking, what they call illicit finance. But they’ll also be promoting better financial products. So for example, FedNow, which is a new system the Fed is going to roll out I believe next year, which is going to enable quicker check processing. And they’re going to be focusing on expanding financial inclusion. Now if you go into the financial stability arena, then the Fed, Treasury and others are going to be looking at the financial stability implications here. It’s important to remember two things. Number one, is it’s quite amazing that $2 trillion in wealth, unfortunately literally was vaporized in less than a year. But it didn’t have any financial stability implications. Now, it’s really bad for investors who lost all that money. On the other hand, it’s really good that it didn’t cause financial instability. And the reason for that is because regulators up until now have been very good about making sure that the crypto industry was not connected and interconnected to the core of our banking system. And so the financial stability focus of the Fed, Treasury and others is going to be continued to protect the banking and financial system to make sure that, as you said earlier, that kind of the wild wild west, anything goes, financial predators running amok in the crypto and other digital assets spaces do not get to the core of our banking and financial system. But it’s also important to remember that there’s a goal here of fostering really genuinely responsible innovation. But it has to be real and not fraud and not just people trying to sell pie in the sky that’s going to make them rich and make everyone else poorer. And the executive order actually strikes this balance very well. So it talks about including the National Science Foundation, the Office of Science and Technology Policy, and others who are going to be involved to ensure that the promises are real and there’s benefits to the American people rather than just threats and wealth extraction.

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