President Biden’s New Executive Order on Cryptocurrency is Good for Law Firms
On March 9, President Joe Biden signed a new Executive Order (the “Executive Order”) calling for a renewed focus on the quickly evolving world of cryptocurrency. The Executive Order sets priorities for the U.S. Government, including creating a digital currency authorized by the U.S. Government.
While many bitcoin purists might argue that government involvement has no place in the world of cryptocurrency, this Executive Order may signal a major turning point in the degree of federal government involvement in the regulation of cryptocurrency. As detailed below, the Executive Order addresses issues that could be a boon for certain kinds of law firms.
1. Protecting consumers
The primary purpose of the Executive Order is to protect consumers from “significant financial risks.” In an industry with such little control over digital assets, the Executive Order will seek to provide a safeguard as investors continue to take part in the growing crypto market. The Executive Order describes the current situation as follows: “In the absence of sufficient oversight and standards, firms providing digital asset services may provide inadequate protections for sensitive financial data, custodial and other arrangements relating to customer assets and funds, or disclosures of risks associated with investment.” With over a trillion dollars in assets, cryptocurrencies are no exception to this need for safe investing. Yet, they pose some of the greatest risks.
Being decentralized and disconnected from any financial institution, cryptocurrencies are, by nature, uninsured and any accidental loss is permanent. These loses can come from a variety of places including hackers, scams, or by simply inputting the wrong wallet address. According to the Executive Order, “Cybersecurity and market failures at major digital asset exchanges and trading platforms have resulted in billions of dollars in losses.” With the number of users growing every day, the need to protect large investments that can disappear in an instant has become concerning for the federal government.
The focus on consumer protection will likely lead to the adoption of detailed regulations. This will create opportunities for law firms with lobbying, consumer finance, regulatory compliance, and litigation capabilities.
2. Protecting the U.S. and global financial systems
A second and arguably more important aspect of the Executive Order is the need to protect the U.S. from potential financial instability created by cryptocurrencies. With the market value of cryptocurrencies skyrocketing over the last decade, the Executive Order argues that cryptocurrencies “may create additional economic and financial risks requiring an evolution to a regulatory approach that adequately addresses those risks.”
The Executive Order opens the door for new regulatory compliance advisory work. Digital asset providers will need to “be subject to and in compliance with regulatory and supervisory standards that govern traditional market infrastructures and financial firms.” Law firms will be necessary for crypto-tech businesses to make sure they are handling their digital assets appropriately in accordance with these new laws that will take place.
Mitigation security will also play an important role. The Executive Order acknowledges a risk of unknown dangers created by cryptocurrencies and it will be necessary to have measures in place for law firms to reduce the severity of these issues when the need arises. This will likely create more opportunities for lawyers with data privacy and related expertise.
3. Criminalizing certain activities relating to cryptocurrencies
The Executive Order’s third objective gives detail into how criminal activity will be approached. Criminals have used cryptocurrencies over the past decade to commit a myriad of crimes “including money laundering, cybercrime and ransomware, narcotics and human trafficking, and terrorism and proliferation financing.” While crime can be carried out with any currency, one of the earliest use cases for bitcoin was when cybercriminals began using the cryptocurrency to buy and sell illegal drugs on websites such as the Silk Road, which was shut down in 2013. With a public ledger that can be viewed by anyone (and fully downloaded), this type of illicit activity is already being monitored and has led to the creation of coins such as Monero which hides transaction history on its blockchain.
Without doubt, this will be one of the most important aspects of the Executive Order which aims to “ensure appropriate controls and accountability for current and future digital assets systems to promote high standards for transparency, privacy, and security — including through regulatory, governance, and technological measures — that counter illicit activities and preserve or enhance the efficacy of our national security tools.” It is not hard to see how this aspect of the Executive Order will be a boon to firms with white collar criminal defense practices.
4. Promoting U.S. leadership in tech
To remain the global economic leader, the Executive Order will encourage “the responsible development of payment innovations and digital assets” within the United States. With tech industry giants such as Google and Meta already under scrutiny, companies in the crypto industry will need to follow strict guidelines “particularly in setting standards that promote: democratic values; the rule of law; privacy; the protection of consumers, investors, and businesses; and interoperability with digital platforms, legacy architecture, and international payment systems.” This aspect of the Executive Order will be of special interest to cyber law and intellectual property attorneys.
Cryptocurrencies are highly susceptible and are often the target of hackers and spam. OpenSea, one of the largest NFT marketplaces online, was hacked just a month before the signing of the Executive Order. With more and more businesses operating under the risk of major hacks, tech companies will need to create new features to protect them. This should create increased demand for law firms with data security and privacy expertise.
5. Promoting access to safe financial services
The fifth objective of the Executive Order is to increase access to banking. The order indicates that, “many Americans are underbanked.” According to the FDIC, about 5.4 percent of American households didn’t have a checking or savings bank account of any kind and are “underserved by the traditional banking system.” Due to this fact, cryptocurrencies have become popular because of their minimal requirements to create a wallet.
Unfortunately, with the known risks of using cryptocurrencies, underbanked citizens are at risk of losing what little assets they may already possess. Firms specializing in data security will see many opportunities to offer their services as cryptocurrencies become more commonplace among lower class Americans that struggle to open a bank account. Intellectual property services will also be necessary for blockchain companies that develop new methods to keep crypto assets secure and require patents.
6. Supporting tech advances and responsible development
The final objective of the Executive Order is for the U.S. to begin supporting businesses with the technological advances necessary to make cryptocurrency investing safer for Americans. The Executive Order states that the federal government will focus on key aspects of new technology being developed for cryptocurrency that is “implemented in a responsible manner that includes privacy and security in their architecture, integrates features and controls that defend against illicit exploitation, and reduces negative climate impacts and environmental pollution.” It appears that the U.S. government will begin working with the various crypto-tech companies that are sprouting up across the country to establish a set of rules for tech companies to follow.
While these rules won’t change the technical aspects of certain coins such as bitcoin, it will affect the exchanges where these cryptocurrencies are bought and sold. By creating this new set of standards for crypto companies to follow, law firms will be required to provide services for regulatory compliance.
7. Exploring U.S. Central Bank Digital Currencies
As a part of technological development in the sixth objective of the Executive Order, an entire section outlines the experimentation to create and decide whether United States Central Bank Digital Currencies (“CBDC”) would be “deemed to be in the national interest.” This development would be massive. Allowing the U.S. to develop its own cryptocurrency can have major impacts on businesses that seek international clients. The order states, “CBDC may have the potential to support efficient and low-cost transactions, particularly for cross‑border funds transfers and payments, and to foster greater access to the financial system, with fewer of the risks posed by private sector-administered digital assets.” With the creation of a national cryptocurrency, law firms around the globe will find it easier to afford business development inside the U.S. as this new CBDC allows them to use the U.S. dollar outside American borders with less transaction fees.
If the U.S. were ever to adopt a central digital currency, it would significantly impact a range of law firm practice areas, including corporate, securities, tax, real estate, customs, and international trade. The implication here is that American business would be able to extend their services to international clients who don’t have the ability to store fiat USD. By using an American cryptocurrency wallet, they then would be able to do deals with an American-backed currency which wouldn’t have been available beforehand, thus increasing the amount goods and services American companies can provide to the world.
The creation of a CBDC would also require an extensive number of legal services for the new technology that would be created. Intellectual property and patents, technology services for both private and public use, cyber security, and data security would all see an uptick in demand.
Within the legal services industry, the most obvious beneficiaries are likely to be Am Law 200 firms. These are the firms that already employ lawyers across the practice areas identified above. Expect accounting firms, private equity backed consulting companies and others to get into the market of providing advice about how to comply with the Executive Order. This is also an opportunity for boutique firms to identify and launch cryptocurrency-related niche practices.
The Executive Order provides a six-month window for the Secretary of the Treasury to take the next steps. “Within 180 days of the date of this order, the Secretary of the Treasury […] shall submit to the President a report on the future of money and payment systems.”
Thus, this is the time for law firms to start identifying how they can serve and attract clients in the cryptocurrency space.