The Financial Stability Supervisory Board, which includes leading federal financial regulators, has recommended Congress legislate in a new report on digital assets, giving them greater power to regulate cryptocurrencies.
The council, which was formed after the Great Recession, voted unanimously to adopt the 124-page report on Monday following Monday's meeting. The report itself follows an executive order signed by President Joe Biden in March asking the federal government to look into the benefits and risks of cryptocurrencies.
As part of the long-awaited report, the board identified three major loopholes in the regulation of cryptocurrencies such as Bitcoin and Ethereum and provided advice on what could be done to close them and ensure better financial stability.
Perhaps the most prominent recommendation is to push Congress to set up a body to oversee the vast majority of all cryptocurrency transactions. The board member noted that federal oversight of the unsecured cryptocurrency spot market is limited.
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Securities, like shares offered by public companies, are regulated by the Securities and Exchange Commission in accordance with applicable law. However, many cryptographic tokens do not meet the definition of security. The report does not specify which regulator has the authority to oversee cryptocurrencies.
Laws have been introduced to make the Commodity Futures Trading Commission the leading US regulator for cryptocurrencies and give it new authority over the spot market. Recommendations from major regulators only strengthen these efforts.
“The report concludes that cryptocurrency businesses may pose a risk to the stability of the US financial system and emphasizes the importance of proper regulation, including enforcement of existing laws. It is critical that government stakeholders work together to move forward. This recommendation," said the Ministry of Finance. Secretary Janet Yellen, who chairs the board.
The report acknowledges that there are opportunities for regulatory arbitrage in the crypto space and wonders whether vertically integrated market structures can or should adapt to existing laws and regulations.
In addition, the board has also proposed legislation to address the risks posed by stablecoins, which are tokens that anchor their value to underlying assets such as dollars. The board also called for legislation giving regulators more power to oversee branches and affiliates of cryptocurrency entities and adequate legislation for service providers.
To address the first point, the board recommended that Congress pass legislation that gives federal financial regulators the power to set cash market regulations for cryptocurrencies other than securities.
“The board recommends that these regulators do not interfere with or undermine the jurisdictional powers of current market regulators. Regulators should cover a wide range of topics," the report said. Legislation should provide enforcement and review powers to ensure compliance with these rules.
The board also recommended that lawmakers pass legislation establishing a "comprehensive federal regulatory framework for stablecoin issuers" that addresses investor protection, market integrity, and payment system risks.
"The board recommends that federal and state regulators coordinate oversight of stablecoin issuers, if necessary," the report reads. "The board remains prepared to consider existing measures to address the risks of these stablecoins in the absence of comprehensive legislation."
Among various other recommendations related to digital assets, the board also stressed that the continued enforcement of existing rules and regulations is also important to reduce the risk that cryptocurrency assets pose to the US financial system.
“I agree with the FSOC recommendation that Congress should act first. In fact, I would argue that digital assets are new products that NEED Congressional action BEFORE the SEC and CFTC have the authority to act. “Write or enforce rules about it,” said Eloisa Marchesoni, angel investor and cryptocurrency advisor, in a statement to the Washington Examiner after the report was released.
Marchesoni said that while he agrees that Congress should be the authority to act first on the regulatory front, he fears the Biden administration will use the report to over-regulate cryptocurrencies.
The report was highly anticipated due to the emergence of cryptocurrencies in just a few years. The Biden administration's executive order is just another step in the US government's mission to better understand the cryptocurrency market and its wider implications for finance and consumers.
The White House described the executive order as a government-first strategy for digital assets. The popularity of digital assets has skyrocketed, with a market cap of more than $3 trillion as of last November, up from just $14 billion five years ago. The government also estimates that around 40 million people have traded or used cryptocurrencies, a number that represents more than 12% of the country's population.
"The rise of digital assets creates opportunities to strengthen America's leadership in the global financial system and at the technology frontier, but also has significant implications for consumer protection, financial stability, national security, and climate risk," he said. House.
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While digital assets remain the center of attention for regulators, the market has faced some turbulence this year as investors flee risky assets to safety. Bitcoin, the flagship cryptocurrency, collapsed amid the turmoil, wiping out billions of dollars in value.
Bitcoin exploded in late September last year, hitting an all-time high of $69,000 in November. But on Monday, bitcoin's price fell below $20,000, where it held on for several weeks. Bitcoin is now worth about 71% less than its peak.