Regulators should take appropriate actions within their jurisdictions to address risks associated with digital assets like stablecoins, as outlined in a recent report, while continuing to coordinate and collaborate on issues of common interest, the council of financial regulators recommended in its annual report released Friday.
And if federal legislation mandating regulation of stablecoins and other digital assets is not enacted, the group said, regulators should be ready to take steps on their own.
In its 2021 annual report, the Financial Stability Oversight Council (FSOC) made several recommendations, including those on digital assets, transition away from the LIBOR reference rate, climate-related financial risk, and cybersecurity.
“The Financial Stability Oversight Council’s annual report analyzes past episodes of financial turmoil to understand weak points in our financial system. It also reviews the actions taken by the Council to strengthen our financial system, with one eye on the past and one on the future,” said Secretary of the Treasury Janet L. Yellen, who chairs the council made up of leaders of federal financial regulators. “In the coming year, the Council will continue to monitor threats to financial stability and take concrete action where appropriate.”
Regarding digital assets, the report recommends that member agencies consider the November-released report on stablecoins issued by the President’s Working Group on Financial Markets, in conjunction with the Federal Deposit Insurance Corp. (FDIC), and the Office of the Comptroller of the Currency (OCC).
Among other things, that report advocated requiring that stablecoins should only be issued through federally insured depository institutions (such as banks and credit unions) through an act of Congress. The report also recommended that that legislation complement existing authorities held by federal regulators meant to ensure market integrity, investor protection, and prevention of illicit finance.
“The Council recommends that federal and state regulators continue to examine risks to the financial system posed by new and emerging uses of digital assets and coordinate to address potential issues that arise from digital assets,” the report stated. It added that the FSOC will further assess and monitor the potential risks of stablecoins while recommending FSOC members consider actions to address those stablecoin risks by working together.
However, if legislation is not enacted, the FSOC said, it will be ready. “The Council will also be prepared to consider steps available to it to address risks outlined in the PWG Report in the event comprehensive legislation is not enacted,” the report states.
Other recommendations included:
- Climate-related financial risk: Regulators should take prompt action to improve the availability of data and measurement tools, enhance assessments of climate-related financial risks and vulnerabilities, and incorporate climate-related risks into risk management practices and supervisory expectations for regulated entities, where appropriate. “In addition, financial regulators, consistent with their mandates and authorities, should promote consistent, comparable, and decision-useful disclosures that allow investors and financial institutions to take climate-related financial risks into account in their investment and lending decisions,” it stated. The report stated those actions will help the financial system support “an orderly economy-wide transition to net-zero emissions.“
- Transition away from LIBOR (the London Interbank Offered Rate): Market participants should “act with urgency” to address existing exposures and transitions to replacement rates from LIBOR (which ends for new contracts at year’s end, and completely for existing contracts by June 2023). “Member agencies should determine whether regulatory relief is necessary to encourage market participants to address legacy LIBOR portfolios,” the statement noted. Regulators were also advised to continue to use their supervisory authority to understand the status of regulated entities’ transition from LIBOR, “including their legacy LIBOR exposure and plans to address that exposure.”
- Cybersecurity: Federal and state agencies should continue to monitor cybersecurity risks and conduct cybersecurity examinations of financial institutions and financial infrastructures to ensure, among other things, “robust and comprehensive cybersecurity monitoring, especially in light of new risks posed by the pandemic, ransomware incidents, and supply chain attacks.”