Plans Sponsor Alert: Advancing Responsible Innovation of Digital Assets

BDO Series on Digital Assets, Part 3

This article is part of BDO’s series on the White House’s Comprehensive Framework for Responsible Development of Digital Assets.

The cryptocurrency market has plunged from a market cap of $3 trillion in November 2021 to about $900 billion as of November 9, 2022, according to CoinGecko. While assets flow out of the crypto market, developers continue to enter the space according to Electric Capital’s Developer Report. Continued interest in digital assets from developers and entrepreneurs will likely lead to further innovation and growth in digital assets in the near future. These factors heighten the need for greater regulation on advancing responsible innovation in the space.

In its effort to create a responsible framework for the development of digital assets, the Biden Administration tasked several departments and agencies to make policy recommendations on the role the federal government should play to ensure digital asset innovation is done safely and equitably. In heeding the warning from the Department of Labor (DOL) on the safety of cryptocurrencies in 401(k)s, plan sponsors should pay special attention to the ways the White House intends to make digital assets and blockchain offerings easier to access, safer, and more transparent than current options. The White House’s efforts could have a significant effect on whether digital assets are determined to be appropriate investment options for retirement plan participants in the near future.

What exactly is “responsible innovation”?

Dr. Alondra Nelson, head of the Office of Science and Technology Policy (OSTP) and Deputy Assistant to the President wrote in a blog post that as systems grow, it is important to set goals and provide boundaries and guidance where needed. Without comprehensive oversight, everyday investors may find themselves in a challenging or unexpected investment situation. Cryptocurrency regulations are patchy today, but the White House is working on a comprehensive framework to promote fairness, universal access, and transparency.

The federal government has an important but tricky role to play; it could become a key driver for this new technological frontier, or it could become so restrictive that it stifles innovation. With about half of the world’s top 100 financial technology companies located in the United States, the White House cited its historical role in encouraging responsible private-sector innovation, and outlined four major areas of focus:

  • The OSTP and National Science Foundation (NSF) will research next-generation cryptography, transaction programmability, cybersecurity, and ways to lessen the environmental impacts of digital assets.
  • The Treasury Department and appropriate regulators will provide regulatory guidance and share best practices.
  • The Department of Energy and the Environmental Protection Agency (EPA) will track the impact of digital assets on the environment and develop performance standards — preventing hackers from gaming the system requires computing resources that can strain our country’s power grids.
  • The Department of Commerce will call on stakeholders including federal agencies, industry experts, academics, and other key partners to help shape standards, regulations, guidance, and research.

In June 2022, the Responsible Financial Innovation Act (RFIA) was introduced by Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY).  The RFIA’s objective is to provide for responsible financial innovation and to bring digital assets within the regulatory perimeter. The sections of the bill are 1) definitions, 2) responsible taxation of digital assets, 3) responsible securities innovation, 4) responsible commodities innovation, 5) responsible consumer protection, 6) responsible payments innovation, 7) responsible banking innovation, and 8) responsible interagency coordination. Currently, the RFIA is with the Senate Banking, Housing and Urban Affairs committee where hearings have been held in July, September, and November of 2022.

BDO Insight: Be Patient but Prepared

A recent Plan Sponsor Council of America survey showed that 57 percent of respondents would not consider cryptocurrencies as viable investment options which means there is a 43 percent that does want this investment option. A patient approach may be warranted, but the landscape is changing rapidly. Plan sponsors may have to make decisions quickly and will need to know what is available and how to gain access. Therefore, it may be valuable to monitor developments and consider the various available options to ensure plan sponsors can respond to participants’ needs in a timely manner. There are a few service providers that are offering cryptocurrencies right now.

Please reach out to your BDO representative to discuss these developments and the potential benefits and risks of digital assets to your 401(k) plan.