FSOC suggests more regulation and supervision of digital assets.

Three regulatory holes in the present monitoring of cryptocurrencies, stablecoins, and other digital assets have been found, and the Financial Stability Oversight Council (FSOC) has advised actions Congress and federal regulators should do to remedy them in a new study.

As a result of President Joe Biden's Executive Order 14067, "Ensuring Responsible Development of Digital Assets," the Financial Stability Oversight Council (FSOC) published a report on financial stability risks and regulations for digital assets on Monday.

The FSOC research came to the conclusion that if cryptoasset operations are not "paired with appropriate regulation," they "could pose risks to the stability of the U.S. financial system."

According to the FSOC, "crypto-asset activities lack basic risk controls to protect against run risk or to help ensure that leverage is not excessive."  According to the research, crypto assets prices "appear to be primarily driven by speculation rather than grounded in current fundamental economic use cases," resulting in extreme price swings.

Digital assets also lack the transparency and accountability that are available to investors who choose to make their bets on more traditional securities since the almost $3 trillion digital asset market is mostly unregulated.

Three regulatory holes in the "crypto-asset ecosystem's" U.S. regulation were noted in the research and information sheet that accompanied it.

- One flaw is the absence of regulation on the spot markets for crypto assets like bitcoin that are not securities. Trade in these digital assets, according to the research, "does not feature rrobust rules and regulations designed to ensure orderly and transparent trading, prevent conflicts of interest and market manipulation, and protect investors and the economy more broadly." According to the research, Congress should enact legislation giving federal financial authorities regulatory authority over the spot market for cryptoassets that are not securities.

- Another flaw is what the FSOC labeled "regulatory arbitrage" in crypto assets, where some crypto enterprises have subsidiaries and affiliates that operate under several regulatory regimes (i.e., state but not federal regulatory frameworks). No one regulator now has "visibility into the risks across the entire business," as a result. In order to effectively monitor and offer visibility into the operations of crypto-asset affiliates and subsidiaries, the research advocated greater collaboration between state and federal regulators. The research included legislative recommendations to mitigate the dangers that stablecoins represent.

- By starting to provide users with direct access to markets via broker-dealers or futures commission merchants, certain crypto-asset trading platforms have opened a regulatory breach that might have effects on investor protection and financial stability. The report recommended that authorities build up their skills "related to data and to the analysis, monitoring, supervision, and regulation of crypto-asset activities" in addition to suggesting that more research be done on the The report recommended that authorities build up their skills "related to data and to the analysis, monitoring, supervision, and regulation of crypto-asset activities" in addition to suggesting that more research be done on the The report recommended that authorities build up their skills "related to data and to the analysis, monitoring, supervision, and regulation of crypto-asset activities" in addition to suggesting that more research be done on the subject.

In a press release, Secretary of the Treasury Janet Yellen said, "This report provides a strong foundation for policymakers as we work to mitigate the financial stability risks of digital assets while realizing the potential benefits of innovation "... 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."

In a statement in reaction to the FSOC findings, SEC Chair Gary Gensler expressed his opinion that the "vast majority" of crypto assets are securities and should be subject to SEC registration. The same holds true for "crypto intermediaries," such as cryptocurrency trading sites, he claimed. Gensler continued, "[I]n the crypto market there is a lot of noncompliance with the securities laws."

"I look forward to working with colleagues to enhance the investor protection and resiliency of the crypto market," he added. "We can’t let this market undermine our broader capital markets or the economy."

The communication between regulators has to be enhanced, according to Acting Comptroller of the Currency Michael Hsu, in order to overcome the fragmented regulatory monitoring of crypto assets that is now in place.

According to him, "[W]e at the OCC are committed to ensuring that the nexus between crypto and the federal banking system does not become a channel for cross contagion while also supporting innovation and progress"

By fLEXI tEAM