Deputy Treasury Secretary Wally Adeyemo outlined the need for public-private sector collaboration to address the national security risks arising from the expanding digital asset industry.

In remarks before the Chainalysis LINKS Conference, Mr. Adeyemo stressed that Treasury does not view the digital asset industry as one that needs to be significantly restricted. Mr. Adeyemo stated that Treasury does not place blame on the industry for the actions of bad actors, but believes that the industry must work in conjunction with Treasury to address the misuse of cryptocurrencies.

Mr. Adeyemo explained that Treasury's part in addressing such national security risks includes the facilitation of a "public-private partnership around digital asset and blockchain innovation." Mr. Adeyemo cited OFAC's recent publication of a Virtual Currency Compliance Guide as a step in this direction. Mr. Adeyemo also highlighted the importance of (i) Treasury undertaking efforts to enhance and expedite data sharing and (ii) targeted sanctions designations.

Mr. Adeyemo also detailed certain efforts that the private sector should undertake to mitigate the national security risks posed by the digital asset markets. In particular, Mr. Adeyemo highlighted the importance of companies prioritizing compliance over growth to prevent their inadvertent facilitation of illicit activity. Mr. Adeyemo also emphasized the importance of companies engaging in self-regulation to ensure compliance with AML regulations, rather than waiting for Treasury to take enforcement action.

Commentary

Deputy Treasury Secretary Adeyemo's remarks provide important clarity as to how Treasury views its role with respect to regulation of the digital asset markets. Mr. Adeyemo states that the "OFAC requirements apply to the virtual currency industry the same way they do to traditional banks," and that Treasury will use targeted sanctions, among other regulatory tools, to mitigate illicit activity in the digital asset markets. However, he also emphasizes cooperation between Treasury and digital asset market participants to facilitate a "regulatory environment that fosters responsible innovation," particularly on the issue of cross-border payments. Thus, as a whole, Mr. Adeyemo's comments appear notably less skeptical of digital asset markets than those of other prudential regulators.

Mr. Adeyemo's remarks also raise broader questions about the proper approach to regulation of digital asset markets, particularly from a prudential regulatory perspective. Mr. Adeyemo states that policymakers must respond to three sets of risks posed by digital assets: (i) risks to consumer and investor protection; (ii) risks related to financial stability; and (iii) national security risks (e.g., risks related to money laundering and terrorist financing). This formulation prompts certain questions: What characteristics distinguish, for example, financial stability risk from national security risk? Shouldn't the risks to financial stability generated by digital asset markets also be considered national security concerns, particularly since a failure in such markets (which are now valued at over $2.5 trillion) would likely cause systemic financial instability? If not, why not? As a prudential regulatory framework continues to be developed to account for digital assets, the interrelationship between consumer/investor protection risks, financial stability risks, and national security risks should be thoroughly considered.

Cadwalader's Steven Lofchie contributed to this comment.