Crypto-asset activities could pose risks to the stability of the U.S. financial system, according to a report issued late Monday by the Treasury Department, which also emphasizes the importance of appropriate regulation, including enforcement of existing laws.
Treasury Secretary Janet Yellen, who issued the report as chairman of the Financial Stability Oversight Council (FSOC), said “it is vital that government stakeholders collectively work to make progress” on recommendations made in the report.
Later in the evening, Acting Comptroller of the Currency Michael Hsu voiced support for the report’s recommendations, particularly those focusing on minimizing regulatory arbitrage. He urged Congress and the FSOC to prioritize the report’s recommendations regarding interagency coordination, a federal prudential framework for stablecoin issuers, and regulatory visibility and authorities over all of the activities of crypto-asset entities. “Properly implementing these recommendations will help mitigate regulatory arbitrage and, thus, risks to financial stability,” Hsu said.
The report, which was mandated by an executive order issued by President Joe Biden (D) in March (“Ensuring Responsible Development of Digital Assets”), makes three key recommendations:
- Passage of legislation providing for rulemaking authority for federal financial regulators over the spot market for crypto-assets that are not securities;
- Steps to address regulatory arbitrage including coordination, legislation regarding risks posed by stablecoins, legislation relating to regulators’ authorities to have visibility into, and otherwise supervise, the activities of all of the affiliates and subsidiaries of crypto- asset entities, and appropriate service provider regulation; and
- Study of potential vertical integration by crypto-asset firms.
The report also recommends that FSOC members bolster their capacities related to data and to the analysis, monitoring, supervision, and regulation of crypto-asset activities.
Several characteristics of crypto-asset activities have “acutely amplified” instability with the crypto-asset ecosystem, the report contends. Those include:
- Many crypto-asset activities lack basic risk controls to protect against run risk or to help ensure that leverage is not excessive.
- Crypto-asset prices appear to be primarily driven by speculation rather than grounded in current fundamental economic use cases, and prices have repeatedly recorded significant and broad declines.
- Many crypto-asset firms or activities have sizable interconnections with crypto-asset entities that have risky business profiles and opaque capital and liquidity positions.
- 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.
“These vulnerabilities are partly attributable to the choices made by market participants, including crypto-asset issuers and platforms, to not implement or refuse to implement appropriate risk controls, arrange for effective governance, or take other available steps that would address the financial stability risks of their activities,” the report states.