Plan Sponsor Alert: Digital Assets’ Potential Benefits and Risks
By Laura Zindel and Cindy Sandomenico
Digital assets such as cryptocurrencies and non-fungible tokens (NFTs) are growing and disrupting the way consumers and businesses pay, bank, and invest. A recent survey by Capitalize found that 60 percent of respondents would like a cryptocurrency investment option in their 401(k) plans. Several service providers, including Fidelity, have responded to that request by offering 401(k) participants direct but limited cryptocurrency investment options. Meanwhile, earlier this year, the Department of Labor (DOL) issued a stern warning about cryptocurrencies in 401(k) accounts.
To help plan sponsors better understand digital assets and evaluate whether plan offerings focused on digital assets are a potential fit for their organization, we are sharing a series of articles about the asset class and recent regulatory developments, including the Biden administration’s comprehensive plan for responsible development of digital assets. This first article in the series examines how the federal government is assessing the benefits and risks that cryptocurrencies pose to consumers, investors, and businesses.
White House calls for research on digital assets
In March 2022, the Biden administration issued an executive order calling for the federal government to report its findings on the risks and benefits of cryptocurrencies and other digital assets. For six months, various agencies conducted research and offered recommendations for responsibly developing the U.S. digital asset industry. The result of this work was a fact sheet that was released in September and outlined six main concepts for the development of responsible digital assets nationally and globally: consumer and investor protection; promoting financial stability; countering illicit finance; U.S. leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation.
Protecting consumers, investors, and businesses
The U.S. government believes that without a solid framework of rules and regulations for digital assets, innovations in this sector could be harmful to consumers, investors, and businesses. In response to the White House calling for research on digital assets, several federal agencies issued reports addressing the potential benefits and challenges in protecting Americans from some of the potential risks posed by digital assets.
The Treasury Department’s report noted that about 12% of Americans own some form of digital asset. While the number of people holding these assets has grown, the volume of fraud and other scams has increased as well. The Federal Trade Commission (FTC) reported that more than 46,000 incidents of cryptocurrency-related fraud occurred between January 1, 2021, and March 31, 2022, valued at more than $1 billion.
The Treasury Department’s report made four main recommendations:
- Expand regulatory oversight: Regulators including the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) should expand and increase investigations and enforcement related to digital assets, especially regarding potential misrepresentations made to consumers. Agencies also should increase their coordination of enforcement efforts between agencies as such efforts have been effective in shutting down fraudulent actions.
- Increase focus on scams and aggressive marketing: Online activities like gaming and entertainment are havens for scams, the Consumer Financial Protection Bureau (CFPB) and FTC should expand investigations into consumer complaints. The Department of Labor should also ensure that 401(k) plans and participants are protected from aggressive marketing, conflicts of interest, and bad-faith cryptocurrency investments.
- Encourage cross-collaboration between agencies: While several regulatory agencies have issued guidance to deal with increasing cryptocurrency issues, the Treasury Department would like to see more cross-collaboration among agencies to create more comprehensive oversight. Building a more connected, cross-agency response is critical to promote safety and reduce consumer, investor, and business confusion as well as the potential for fraud.
- Educate consumers on digital assets: Through its website MyMoney.gov, the Financial Literacy and Education Commission (FLEC) has taken the lead on educating consumers, investors, and businesses on financial issues. Now the FLEC will educate the public on common digital asset risks and scams and ways to report abuse. FLEC member agencies will also review the lack of information available to more vulnerable groups to help better understand the risks and opportunities they face. Lastly, the FLEC will engage with industry experts and academics to promote and coordinate public/private partnerships for financial education outreach.
Insight: Take a long-term approach to digital assets
Financial advisors often encourage investors to focus on the long-term and avoid trying to time the market with their 401(k) investments. Similarly, plan sponsors may want to take a long‑term perspective regarding their own approach to digital assets. Given today’s massive surge in the variety and scope of digital assets, plan sponsors should seek to understand their role in the financial landscape before rushing to implement changes.
Cindy Sandomenico, EBP, Employee Benefit Plans, Laura Zindel