The Burgeoning Era of Digital Assets in the U.S.

Cryptocurrency, blockchain, digital assets. Less than 10 years ago these terms were more space-age ideals of the future of money, payments, and investments. Today, while we wouldn't necessarily consider them mainstream, they are a burgeoning component of the U.S.' vast financial ecosystem.

Case in point: Today, approximately 16 percent of Americans use cryptocurrency, or about 53 million people. Money invested in blockchain in the U.S. continues to increase, with spending on products and services expected to reach $41 billion by 2025. All of this has resulted in the escalating growth of digital assets, which are now valued at $3 trillion.

It is safe to say that the U.S. government has taken note of this budding enterprise. In March, President Biden issued an Executive Order on Ensuring Responsible Development of Digital Assets, which is the first ever, whole-of-government approach to exploring and addressing a national digital assets strategy. In August, the Federal Reserve Board released guidance for banking organizations engaging or seeking to engage in crypto-asset-related activities. But it hasn't stopped at the federal level. Now, individual states are tackling digital assets and cryptocurrency as well. 

On May 4, California became the first state to begin the creation of a comprehensive framework to encourage responsible development and support for blockchain-based initiatives, with the issuance of Executive Order N-9-22. Under the Executive Order, "California will begin the process of creating a regulatory approach to spur responsible innovation while protecting California consumers, assess how to deploy blockchain technology for state and public institutions, and build research and workforce development pathways to prepare Californians for success in this industry."

In California, the Department of Financial Protection & Innovation (DFPI), a newly established entity, will spearhead the effort to develop its regulatory approach to blockchain-based activities. Formerly operating like a standard state banking agency, the new DFPI serves as a more progressive agency, with specialized services and units.

Adam Wright, Senior Counsel with the Office of Financial Technology Innovation at DFPI, said during a recent U.S. Faster Payments Council Town Hall, "Like a lot of other agencies, we now have an Innovation Office… We have a Research Office with a number of data scientists…They help us to be a proactive regulator. Not just react to things after they've happened. Because now we have a law that give us broad flexible jurisdiction for any new product or service that is financial that pops up in California. We now have the ability to provide oversight and so that's what we've been stood up to be able to do. Because we understand that products and services are always going to change. And we're not going to always have a licensing law which would tell exactly us how it should be offered. Now, we try to change with that."

To support those changes, Wright and the DFPI will focus on select efforts stemming from the Executive Order. While the Order itself has a number of focus areas, the DFPI has prioritized five specific activities to start:

1. Regulate crypto asset-related financial services and products – building out a regulatory approach based on industry input and market understanding to help ensure new, responsibly innovative products can come out quicker.
2. Enhance review and handling of crypto asset-related complaints – conducting a more meaningful review of complaints and providing the best outcomes for consumers, as well as speaking more vocally about issues based on complaints received.
3. Provide and publish guidance for state-chartered banks, credit unions, and trust companies – developing guidance based on a survey of bank, credit union, and trust licensees to help ensure uncertainty is not an obstacle to launching new products and services.
4. Publish general consumer protection principles – based on surveys and market research, publishing important rules for companies consider that could include model disclosures, principles on error resolution, and cybersecurity guidance.
5. Produce consumer education materials – with input from stakeholders including consumer advocacy agencies and trade groups to ensure balance, developing tools to educate consumers.

While the California Executive Order directs the DFPI to oversee execution of these initiatives, Wright emphasizes that they can't be accomplished alone. "We understand this needs to be harmonized as much as we can with our federal counterparts who are doing work under President Biden's Executive order, but also really critical with other states," he said. "We want to make this as efficient as we can from the get go. So that we are not trying a decade later to harmonize or clean up a patchwork of different rules and regulations that might happen between all the states."

Wright added, "We need to talk to entrepreneurs. We need to talk to consumer advocates. We need to talk to everyone involved in the ecosystem to help make sure that we get as much input as we can, learn as much as we can, understand as much as we can before we start putting in place those key regulations to create that regulatory approach."

If the statistics didn't serve as a predictor, and the federal orders and guidance as some pretty clear writing on the wall, California's latest efforts should paint a strong picture of what could come in the new world of digital assets. At this point, we can only assume that other states will likely be considering similar actions and activities, and as such it is imperative for New England financial institutions to continue monitoring and staying abreast of happenings and advancements.

It is fair to say cryptocurrency, blockchain and the like are no longer futuristic concepts that the most tech-savvy and cutting edge will leverage and benefit from. They are a growing development in financial services, and as banks and credit unions that may be considering digital assets or have customers using digital assets, we need to stay vigilant so that we, too, can benefit from and responsibly support the future of financial services.