The Financial Stability Oversight Council, which comprises the top federal financial regulators, recommended that Congress craft legislation to give them more authority to regulate cryptocurrencies in a new report on digital assets.
The council, which was created in the wake of the Great Recession, voted unanimously to approve the 124-page report on Monday following a meeting Monday. The report itself follows an executive order signed by President Joe Biden in March that compelled the federal government to analyze the benefits and risks of cryptocurrencies.
As part of the much-anticipated report, the council identified three main gaps in the regulation of cryptocurrencies such as bitcoin and ethereum and offered suggestions for what can be done to close those and better ensure financial stability.
Perhaps the most notable of the recommendations was an encouragement for Congress to decide on an agency to oversee the bulk of all cryptocurrency transactions. Members of the council pointed out that there is limited federal oversight of the spot market for cryptoassets that are not securities.
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Securities — for example, stocks offered by public companies — are regulated under existing law by the Securities and Exchange Commission. Many crypto tokens, though, do not meet the definition of a security. The report did not specify which regulatory agency would be given authority to oversee crypto.
Legislation has already been introduced to make the Commodity Futures Trading Commission the main U.S. cryptocurrency regulator, giving it new authority over spot markets. The recommendation by top regulators only fortifies that effort.
“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,” said Treasury Secretary Janet Yellen, who heads the council.
The report acknowledged that there are opportunities for regulatory arbitrage in the crypto space and questioned whether vertically integrated market structures can or should be accommodated under existing laws and regulations.
In addition, the council also suggested legislation to address the risks posed by stablecoins, which are tokens that tie their value to an underlying asset, such as the dollar. The council also called for legislation to give regulators more power to supervise the affiliates and subsidiaries of cryptoasset entities and appropriate service provider legislation.
To address the first point, the council recommended that Congress pass legislation giving rule-making authority to federal financial regulators over the spot market for cryptoassets that are not securities.
“The Council recommends that this rulemaking authority should not interfere with or weaken market regulators’ current jurisdictional remits. The rulemaking authority should cover a range of subjects,” the report reads. “Legislation should provide for enforcement and examination authority to ensure compliance with these rules.”
The council also recommended that lawmakers pass legislation that would form a “comprehensive federal prudential framework for stablecoin issuers” that would address investor protection, market integrity, and payment system risks.
“The Council recommends that federal and state regulators coordinate on the supervision of stablecoin issuers as appropriate,” the report reads. “The Council remains prepared to consider steps available to it to address such risks related to stablecoins in the event comprehensive legislation is not enacted.”
In addition to several other recommendations related to digital assets, the council also emphasized that continued enforcement of existing rules and regulations is also key to mitigating the risks that cryptocurrency-asset activities pose to the U.S. financial system.
“I agree with the FSOC recommendation that Congress needs to act first. In fact, I would say that digital assets are novel products that REQUIRE Congressional action BEFORE the SEC and CFTC has authority to write or enforce rules on them,” Eloisa Marchesoni, an angel investor and cryptocurrency consultant, told the Washington Examiner in a statement following the report’s release.
Marchesoni said that while she agrees that Congress should be the authority to act first within the regulatory domain, she fears that the Biden administration will use the report to overregulate crypto.
The report was much anticipated because of the rise of cryptocurrencies in a few short years. The executive order by the Biden administration is just another step in the U.S. government’s mission to understand the cryptocurrency market and its broader implications for finance and for consumers better.
The White House described the executive order as the first whole-of-government strategy related to digital assets. Digital assets have exploded in popularity, with the market cap exceeding $3 trillion last November, up from just $14 billion five years before that. The government also estimates that some 40 million people have traded or used cryptocurrencies, a number that is equivalent to more than 12% of the country’s population.
“The rise in digital assets creates an opportunity to reinforce American leadership in the global financial system and at the technological frontier, but also has substantial implications for consumer protection, financial stability, national security, and climate risk,” the White House said.
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While digital assets are still in the focus of regulators, the market has faced some upheaval this year as investors fled risky assets for safe havens. Bitcoin, the flagship cryptocurrency, has been tanking amid the shake-up, erasing billions of dollars in value.
Bitcoin ballooned near the end of last September and rallied to an all-time high of $69,000 in November. But, as of Monday, the price of one bitcoin has fallen to below $20,000, where it has been hovering for the past several weeks. Bitcoin is now worth about 71% less than it was at its zenith.
