Overview of the President’s Working Group Report
The President’s Working Group on Digital Asset Markets has unveiled a report titled “Strengthening American Leadership in Digital Financial Technology,” released on July 30. This document, stemming from Executive Order 14178 issued in January, outlines a comprehensive series of recommendations aimed at regulating digital assets and blockchain technology within the United States. This article will explore the significant implications of the report for businesses, financial institutions, and investors.
Purpose and Key Priorities of the Report
The report serves to meet the working group’s directive of proposing regulatory and legislative frameworks that encourage the responsible advancement of digital assets and blockchain technologies. While it does not alter existing regulations on digital assets immediately, influential federal agencies are likely to pursue recommendations that do not necessitate new legislation. The main priorities outlined in the report encompass: safeguarding the rights of individuals and businesses to utilize open blockchain networks and manage their digital assets independently; reinforcing the U.S. dollar’s global standing through stablecoin support; prohibiting the establishment or adoption of central bank digital currencies (CBDCs) in the U.S.; clarifying legal ownership and usage rights of digital assets; ensuring equitable treatment of digital asset businesses by banks and regulators; and promoting U.S. leadership in digital asset innovation, payment systems, and anti-money laundering efforts.
Proposed Structure for Digital Asset Markets
The report suggests a three-tier classification system for digital assets: Security tokens, which fall under the SEC’s jurisdiction; Commodity tokens, regulated by the CFTC; and Commercial or consumer use tokens, such as stablecoins and utility tokens. This classification aims to minimize regulatory overlap and arbitrage. Furthermore, the report advocates for specific exemptions from securities registration for digital asset distributions, including safe harbors for nascent projects that are not yet fully operational or decentralized. It also seeks to permit non-security digital assets tied to investment contracts to be traded on non-SEC platforms right after issuance and offers relief to certain decentralized finance (DeFi) service providers from registration requirements for broker-dealers, exchanges, and clearing agencies.
Immediate Recommendations for Market Participants and Regulators
The report outlines several immediate actions, including: Securities Offerings Relief, which calls for exemptions from registration for digital asset offerings; Trading and Registration Relief, allowing non-security digital assets to be traded on non-SEC platforms post-issuance; Modernized Market Rules, which advocate for updating the definition of “exchange facility” and modernizing rules for transfer agents and wallet providers; Custody Rules to clarify how investment firms can securely hold digital assets classified as securities; and guidance from the CFTC regarding the classification and trading of digital assets as commodities.
Coordination Between the SEC and CFTC
The report encourages collaboration between the SEC and CFTC, advocating for synchronized rulemaking and public comment processes. It suggests establishing regulatory sandboxes or safe harbors with defined eligibility criteria and exit strategies, as well as considering a special category for qualified participants to trade digital asset derivatives through regulated intermediaries.
Long-Term Recommendations for Market Structure
For the long run, the report proposes a unified user interface that enables digital asset firms to provide trading, custody, and brokerage services under one roof while ensuring strong safeguards and transparency. It also suggests updating CFTC regulations to facilitate blockchain-based derivatives, including requirements for clearing, reporting, and margin in non-intermediated settings. Should Congress remain inactive, the SEC and CFTC are urged to utilize their existing powers to provide regulatory clarity and encourage responsible innovation.
Market Structure Legislation Insights
The report emphasizes the significance of the Digital Asset Market Clarity Act of 2025 (CLARITY), which lays the groundwork for the market structure by dividing oversight responsibilities between the SEC and CFTC, upholding self-custody rights, and supporting efficient trading and DeFi. It urges Congress to ensure that federal legislation supersedes state laws for SEC and CFTC-registered firms and to establish clear, efficient licensing and reporting protocols for digital asset intermediaries.
Focus on DeFi and Innovation
The report recommends that regulations should be based on actual control over assets, the ability to alter software, and the level of centralization. It advocates for tailored regulations for DeFi to reflect its distinct characteristics rather than applying traditional financial rules indiscriminately. Measures should be taken to prevent exploitation through the structuring of products solely to evade legal obligations.
Accounting Recommendations
The Financial Accounting Standards Board (FASB) has provided guidance on assessing digital assets at fair value. The report advises that FASB seek additional feedback on several issues, including when digital assets should be recognized or removed from balance sheets, how to account for tokens issued by companies, the treatment of stablecoins, and the accounting for tokens that offer utility or access without explicit legal rights. It highlights the necessity for updated accounting and auditing standards as the adoption of digital assets continues to rise.
Changes Suggested for Banks and Digital Asset Activities
The report advocates for clear guidelines regarding permissible digital asset activities for banks. This includes custody solutions, utilizing third-party providers, managing stablecoin reserves, and engaging in pilot programs. It calls for equitable treatment for all banks, independent of their size or technology, along with transparent processes for obtaining charters and Reserve Bank master accounts, with automatic approvals in the absence of extraordinary circumstances. Additionally, it emphasizes the importance of risk-based capital and liquidity requirements for digital asset activities in line with international standards.
Stablecoins and Payments Regulation
The report supports the GENIUS Act, which mandates that U.S. dollar-backed stablecoins must be entirely backed by high-quality, liquid assets and redeemable at a 1:1 ratio for cash. It requires monthly disclosures of reserves, prohibits misleading claims about government support, and necessitates that stablecoin issuers be licensed in the U.S. or comply with equivalent foreign standards. The act prioritizes claims of stablecoin holders in cases of insolvency and mandates that custodians separate reserves. It also clarifies that U.S.-licensed payment stablecoins are neither securities nor commodities, imposes stringent anti-money laundering (AML) and counter-terrorism financing (CFT) requirements on issuers, and promotes private sector solutions while banning government-issued CBDCs.
Addressing Illicit Finance
The report calls for the swift implementation of the GENIUS Act’s AML regulations for stablecoin issuers. It requests updated guidance from FinCEN for digital assets, including new classifications for digital asset financial institutions, and legislation to clarify when U.S. AML rules apply to foreign entities. It emphasizes the importance of ensuring individuals’ rights to self-custody digital assets and clarifying that software providers without complete control do not qualify as money transmitters. The report advocates for improved information sharing between digital asset entities and traditional financial institutions, enhanced participation in FinCEN’s information sharing programs, and new regulations that empower the Treasury to block or condition specific digital asset transfers associated with illicit activities, even outside conventional banking channels. It also calls for updated victim compensation and asset forfeiture laws to address digital assets and broaden anti-tipping off and theft regulations to encompass digital asset businesses, alongside flexible cybersecurity standards and better sharing of cyber threat intelligence.
Key Tax Recommendations
The report suggests establishing guidance on the taxation of digital asset transactions, encompassing staking, mining, and wrapping. It proposes treating digital assets as a distinct asset class for tax purposes, with regulations similar to those applicable to stocks or commodities. The report calls for clarification regarding the tax treatment of stablecoins, including their classification as debt, and the need to address wash sale and anti-bearer bond regulations. It advocates for the application of wash sale rules to digital assets (excluding stablecoins) and an update of broker reporting obligations. Additionally, it recommends that loans of actively traded digital assets be treated equivalently to securities loans and provides guidance for small digital asset receipts (airdrops, staking, mining) while updating rules concerning the timing of income derived from mining and staking. Finally, it emphasizes the need for reporting foreign digital asset accounts and streamlining reporting processes for the IRS and FinCEN, ensuring consistency in broker and business reporting requirements without imposing excessive burdens.
Conclusions
The White House’s roadmap for digital assets signifies a transition towards more transparent and supportive regulations for digital assets and blockchain technology in the U.S. Federal agencies, including the Treasury, SEC, CFTC, OCC, and FDIC, are anticipated to act swiftly in implementing the recommendations from the report. Congress is also likely to consider new legislation aimed at clarifying the digital asset market structure, tax regulations, and measures to combat illicit finance. Companies are advised to reassess their compliance, risk management, and reporting procedures in light of these recommendations and to stay alert for additional regulatory and legislative changes.
