US Treasury

The Financial Stability Oversight Council has released a Digital Asset Financial Stability Risks and Regulation report. They agreed to pass the report to set a solid foundation for policymakers to mitigate the financial stability risks of digital assets.

US Treasury addresses stability risks and regulatory gaps in crypto

The report seeks to address the financial stability risks of cryptocurrencies and the regulatory gaps in the sector. The Secretary of State, Janet Yellen, has said that the report is an essential contribution to the different reports that the Treasury and its partners have produced per the executive order by President Joe Biden.

According to Yellen,

Crypto-asset activities could pose risks to the stability of the US financial system and emphasizes the importance of appropriate regulation, including enforcement of existing laws.

In the report, the US Treasury said that cryptocurrency activities posed a risk to the stability of the US financial system because of their connection to the traditional financial system while remaining largely unregulated.

The report acknowledges that the crypto market has grown significantly over the past year. While the interconnectedness between the traditional financial system and the crypto market was limited, it could increase notably.

Moreover, crypto social trading platforms could diversify their services. These platforms could offer asset custody and leverage trading activities to retail investors and traditional financial institutions. Consumers can also increase their exposure to crypto activities.

The US Treasury has also said there are vulnerabilities in the crypto asset ecosystem. Cryptocurrency seemed to be driven by speculation instead of fundamental use cases. Moreover, prices have repeatedly reported steep declines.

There was also the issue of the concentration of key services despite the sector promoting itself as distributed. Vulnerabilities linked to distributed ledger technology were also on the rise. Such vulnerabilities could be attributed to the choices made by market participants such as crypto asset issuers and platforms.

Enforcing the existing regulatory framework

The US Treasury also noted that most of the nonbanking companies within the crypto ecosystem had promoted themselves as being regulated. However, these firms are controlled mainly by anti-money laundering and consumer protection laws, which do not constitute a comprehensive framework for mitigating the vulnerabilities in the financial sector.

One of the main steps people needed to follow to regulate the crypto market was to comply with and enforce the existing regulatory framework. Moreover, the issuers of different crypto assets offered and sold cryptocurrencies while violating federal and state securities laws.

Regulators have also taken enforcement actions to address non-compliance with the existing regulations in the past years. Additionally, false statements about the availability of federal deposit insurance for a product were a violation of the law, but they have made customers appear like the government protects them while they are not.

The report also notes that the existing regulatory framework covered a large part of the crypto ecosystem, but there were some gaps in the regulatory framework for these assets. First, crypto assets not ranked as securities were subject to limited federal regulations.

Several retail trading platforms also provided customers with direct access to the market, which raised complications with financial stability and investor protection.

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