The Financial Stability Oversight Council (FSOC) released a new report this week on the financial stability risks of digital assets and recommended legislative fixes.
The report — which stemmed was done in response to President Joe Biden’s executive order on “Ensuring Responsible Development of Digital Assets” – examines the financial stability risks and regulatory gaps posed by various digital assets. It also offers recommendations to address such risks.
“This report provides a strong foundation for policymakers as we work to mitigate the financial stability risks of digital assets while realizing the potential benefits of innovation,” Secretary of the Treasury Janet Yellen said. “It is an important contribution to the set of reports that Treasury and our interagency partners have produced as part of President Biden’s executive order. The report concludes that crypto-asset activities could pose risks to the stability of the U.S. financial system and emphasizes the importance of appropriate regulation, including enforcement of existing laws. It is vital that government stakeholders collectively work to make progress on these recommendations.”
Among the risks, the report found that many crypto-asset activities lack basic risk controls to protect against run risk or to help ensure that leverage is not excessive. Further, crypto-asset prices appear to be primarily driven by speculation rather than grounded in current fundamental economic use cases. In addition, many crypto-asset firms or activities have sizable interconnections with crypto-asset entities that have risky business profiles and opaque capital and liquidity positions. Finally, despite the distributed nature of crypto-asset systems, operational risks may arise from the concentration of key services or from vulnerabilities related to distributed ledger technology.
To address regulatory gaps, the council recommends passing legislation that provides rulemaking authority for federal financial regulators over the spot market for crypto assets that are not securities. It also recommends taking steps to address regulatory arbitrage, including coordination, legislation regarding risks posed by stablecoins, and legislation relating to regulators’ authorities to supervise the activities of all of the affiliates and subsidiaries of crypto asset entities. Finally, it recommends bolstering its members’ capacities related to data and the analysis, monitoring, supervision, and regulation of crypto asset activities.