Lawmakers Seek More Oversight of Crypto, Citing Digital Currency Fraud
According to the Federal Trade Commission’s latest “Data Spotlight,” consumers reported losing over $1 billion to fraud involving cryptocurrencies from January 2021 through March 2022.
Crypto investment scams, tempting consumers with the promise of high returns, have resulted in one out of every four dollars lost to scammers, according to the report. Between geographical fragmentation, a lack of government backing, and a scarcity of case law to determine the legality of smart contracts, consumers have little recourse when they fall victim to fraud. More than ever, consumers are increasingly investing in crypto assets and policymakers are beginning to take notice. In March of this year, President Joe Biden signed his Executive Order (EO) on Ensuring Responsible Development of Digital Assets. According to the EO, “The rise in digital assets creates an opportunity to reinforce American leadership in the global financial system and at the technological frontier, but also has substantial implications for consumer protection, financial stability, national security, and climate risk. The United States must maintain technological leadership in this rapidly growing space, supporting innovation while mitigating the risks for consumers, businesses, the broader financial system, and the climate. And, it must play a leading role in international engagement and global governance of digital assets consistent with democratic values and U.S. global competitiveness.”
Biden’s executive order focuses on six areas:
1. Protect consumers, investors, and businesses.
2. Protect U.S. and global financial stability, and mitigate systemic risk.
3. Mitigate the illicit finance and national security risks posed by the illicit use of digital assets.
4. Promote U.S. leadership in technology and economic competitiveness to reinforce U.S. leadership in the global financial system.
5. Support technological advances and ensure responsible development and use of digital assets.
6. Promote equitable access to safe and affordable financial services.
The EO grants broad authority to the Treasury Department, in consultation with other financial regulators, to take the leading role in making policy recommendations. This interagency effort is expected to result in a progress report returned back to the president’s office.
California Governor Newsom also signed Executive Order N-9-22, which directs the Department of Financial Protection and Innovation, the Governor’s Office of Business and Economic Development and the Business, Consumer Services and Housing Agency to seek feedback from crypto asset stakeholders on the development of a regulatory framework.
Within 60 days from the publication of the aforementioned report by the U.S. Treasury, state authorities must similarly produce a report summarizing their findings and recommendations. CBA recently provided comments to The Department of Financial Protection and Innovation’s Invitation to Comment on Digital Assets, where we suggested that state regulators expand the California Consumer Protection Law to include a clear and direct regulatory framework for those entities who offer products and services that mirror those offered by regulated, commercial banks.
Despite Biden and Newsom’s effort, some lawmakers fear that the need to protect consumers from financial harm warrants quicker, more definitive action. Assemblymember Tim Grayson, Chair of the Assembly Banking Committee, is authoring a bill that requires the licensing of digital asset providers. AB 2269 creates the Digital Financial Assets Law and grants regulatory authority to the Department of Financial Protection and Innovation to license and supervise all digital asset activity in the state unless the activity is conducted by a commercial bank. The measure defines “digital assets” as any digital representation of value that is used as a medium of exchange, unit of account, or store of value, and that is not legal tender. AB 2269 requires that the implementation of the Department’s new authority be finalized by January 1, 2024.
While the crypto landscape appears as ever evolving as the technology that catapulted into the financial mainstream, it now seems all but certain that the digital asset ecosystem will not escape regulatory oversight for long. -Jason Lane serves as VP/deputy director of government relations for the California Bankers Association. Learn more at calbankers.com.