Officials from the US Financial Stability Oversight Council (FSOC) have recommended that US lawmakers address the regulatory gaps surrounding crypto in this year’s annual report. Report publication December 16th.
The Council’s 2022 Annual Report assesses developments in key financial markets, discusses potential new risks to America’s financial stability, identifies weaknesses in the financial system, and proposes mitigation measures. increase.
Digital assets are one of five market and credit risk vulnerabilities identified by the Council. Digital assets were identified as a priority area by the Council in February 2022.
In response to Executive Order 14067, Ensuring the Responsible Development of Digital Assets, the Board issued a report on Financial Stability Risks and Regulation of Digital Assets in October. 2
They warned that the US financial system would be endangered by an uncontrolled cryptocurrency in October. The Council recognized lending and borrowing on the trading platforms used by the sector as a major development risk associated with digital or “crypto” assets like stablecoins.
Treasury Secretary Janet Yellen said:
The report concluded that cryptocurrency activity could pose risks to the stability of the US financial system, highlighting the importance of proper regulation, including enforcement of existing laws.
Chaos in the crypto ecosystem
In recent years, the crypto industry has grown in size, including the acceptance of cryptocurrencies by large corporations. Despite this growth, however, the price of cryptocurrencies dropped significantly last year, and coins such as Bitcoin struggled to maintain their value.
While major companies such as Blockfi and Voyager Digital went bankrupt due to financial difficulties, Celsius Network experienced many setbacks before declaring bankruptcy. In November, another major exchange, FTX, and several affiliates declared bankruptcy.
According to the annual report, FTX’s troubles caused cryptocurrency prices to fall, but so far have had little impact on the larger US financial system. However, the traditional financial system has not been significantly affected by the disruption of the digital asset ecosystem.
The current regulatory framework and limits on the overall scale of crypto activity have helped to largely insulate traditional financial institutions from the severe volatility seen in the crypto ecosystem.
Despite the fact that most of the digital asset ecosystem is covered by the current regulatory framework, the report identifies three US regulatory gaps for digital asset activity.
First, non-securities digital asset markets will be subject to sparse oversight at the federal level. Second, without a uniform regulatory framework governing cryptocurrencies, these exchanges can easily circumvent regulation by engaging in acts that amount to regulatory arbitrage.
Third, some digital currency trading platforms have announced plans to give retail customers access to financial markets through vertical integration.
Exposure of retail investors to practices commonly employed in vertically integrated trading platforms, such as the automatic and rapid settlement of client positions, could pose risks to financial stability and investor protection. I have.
For this reason, the Board encourages member institutions to assess the impact of potential vertical integration by digital asset companies. Additionally, they propose to develop data-related capabilities and the ability to analyze, monitor, supervise, and regulate actions related to digital assets.