This article is part of BDO’s series on the White House’s Comprehensive Framework for Responsible Development of Digital Assets.
The federal government has long recognized the need to regulate digital assets. However, it has yet to devise an all-encompassing plan to complete the task. As part of the Biden Administration’s Comprehensive Framework for Responsible Development of Digital Assets, the White House directed agencies to look for ways to strengthen digital asset regulation to help stabilize the digital assets market.
Plan sponsors should pay attention to these developments because there is growing interest by participants to invest in cryptocurrencies through direct investments or in brokerage accounts in their 401(k) plan.
The recommendations coming from the White House initiative could provide a stronger understanding in addition to helping plan sponsors and participants more effectively comprehend the potential benefits and risks of digital assets.
Financial risks and regulatory gaps
The Financial Stability Oversight Council (FSOC) issued a report in October that outlined several risks and gaps the federal government should consider addressing to stabilize the digital asset marketplace. The FSOC findings include:
- Crypto asset activity could pose risks to the stability of the U.S. financial system if the asset class was allowed to grow without appropriate regulations and enforcement. For example, spot markets (i.e., exchanges that are made on the spot) might not have the right monitoring systems and could be used for fraud.
- The crypto asset business could benefit from a stronger regulatory structure as no single regulator can see possible risks/threats across an entire organization.
- Some crypto asset trading platforms want to offer retail customers direct access to markets through broker-dealers or futures commission merchants. This may negatively impact consumers who are not savvy investors and cannot close failing positions before automated liquidation kicks in.
In addition to these findings, the FSOC recommended that Congress pass laws to:
- Develop the federal regulatory framework for crypto-asset spot market activities
- Create a comprehensive, practical structure for stablecoins
- Require crypto-asset companies, their affiliates, and subsidiaries to work under consolidated regulations and supervision by appropriate federal agencies
BDO Insight: Uncertainty in offering crypto assets as investments
We previously wrote about the DOL’s 2022 warning for plan sponsors to use “extreme care” in adding cryptocurrency options to 401(k) investment menus and/or brokerage windows. The DOL said plan sponsors who allow crypto investments on brokerage platforms should expect to be questioned about how they balanced their obligation of prudence given the risks these investments pose.
This stance differs from the DOL’s Field Assistance Bulletin 2012-02R, which says that while plan sponsors are responsible for the prudent selection of the brokerage window service provider, they are not obligated to monitor the available investment options.
As the White House and federal agencies continue to develop a regulatory framework for digital assets, plan sponsors should pay close attention to how this effort could affect their ability to allow participants to invest their 401(k) funds in digital assets. It is important to monitor this topic so plan sponsors can better understand their fiduciary obligations to participants.
Please reach out to your DPW representative if you are interested in learning more about the regulation of digital assets.
DPW Tax Department