What U.S. Lawmakers Need To Do About Regulating Crypto This year, Says FSOC

 In their annual report for this year, which was released on December 16, officials from the Financial Stability Oversight Council (FSOC) of the United States advised lawmakers to fix the regulatory gaps around crypto.

The Council’s annual report for 2022 analyses major financial market developments, explores potential new challenges to American financial stability, finds problems in the financial system, and offers suggestions for reducing the risks.

The Council has identified five market and credit risk weaknesses, with digital assets being one of them. The Council selected digital assets as a priority area in February 2022. 

The Council’s Report on Financial Stability Risks and Regulation for Digital Assets was released, ensuring responsible development of Digital Assets, Executive Order 14067, on October 2.

In October, they issued a warning about the dangers of unregulated cryptocurrencies to the American financial system. 

The Council noted that a significant emerging danger concerning digital or “crypto” assets such as stablecoins is lending and borrowing on the industry’s trading platforms.

Janet Yellen, the Treasury Secretary, stated:

The report concludes that crypto-asset operations may pose threats to the stability of the US financial system and underlines the importance of effective regulation, including enforcement of current rules. 

Turbulence In The Ecosystem Of Crypto-Assets

The crypto market has grown in size in recent years due to big businesses accepting cryptocurrencies.

However, despite this growth, prices for cryptocurrencies fell sharply last year, with coins like Bitcoin unable to hold their value. 

Due to financial difficulties, enterprises like Blockfi and Voyager Digital filed for bankruptcy, while Celsius suffered several failures.

Another significant exchange, FTX, and a few related companies filed for bankruptcy in November.

The annual study states that while the FTX problems led to a decline in the price of crypto. In addition, they have so far had minimal impact on the overall U.S. financial system.

However, the turbulence in the digital-asset ecosystem had little effect on the traditional financial system.

Traditional financial institutions have largely been protected from the severe volatility seen in the crypto-asset ecosystem by the existing regulatory framework and the restricted total scale of crypto-asset operations.

Although the present regulatory framework covers a sizable section of the ecosystem for digital assets, the report defines three regulatory holes.

First, there is little federal regulation of digital asset markets that are not securities.

Second, there is no uniform legal framework for cryptocurrencies. However, it is simple for these exchanges to evade rules by acting in what might be consider as regulatory arbitrage.

Third, specific trading platforms for crypto have made plans to use vertical integration to open financial markets to retail clients.

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When retail investors know the wide range of trading methods with fully integrated trading platforms. Such as automatically and quickly closing off customer holdings, financial stability and shareholder protection problems may develop.

As a result, the Council advises member companies to study the impacts of possible vertical integration by digital asset firms.