By Chris Matthews
The Biden administration on Monday laid out its most comprehensive analysis of the risks posed by cryptocurrency to financial stability, urging regulators and Congress to continue to bring enforcement cases against unlawful practices and pass new legislation that more thoroughly regulates the sector.
The Financial Stability Oversight Council, which comprises the heads of every major federal financial regulator and is chaired by Treasury Secretary Janet Yellen, said in a new report on digital assets and financial stability that markets for cryptocurrencies like bitcoin /zigman2/quotes/31322028/realtime BTCUSD +0.95% and ether /zigman2/quotes/108573964/realtime ETHUSD +1.25% could be rife with fraud and that the industry could soon pose systemic risks.
“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,” Yellen said in a Monday statement. “It is vital that government stakeholders collectively work to make progress on these recommendations.”
The report outlines three main areas of concern, including the unregulated nature of digital-asset spot markets, where fraudulent trading practices banned in traditional equity markets — like wash trading that creates the appearance of interest and liquidity in an asset — could be widespread.
The report notes that complaints to the Securities and Exchange Commission about crypto-asset markets have risen five fold since 2019, and points to data from the Federal Trade Commission showing exponential growth in complaints about crypto scams.
FSOC also worries about the potential for digital-asset firms to engage in regulatory arbitrage, as “some crypto-asset businesses may have affiliates or subsidiaries operating under different regulatory frameworks, and no single regulator may have visibility into the risks across the entire business.”
A third area of concern is “vertical integration” of crypto services, whereby trading platforms aim to provide exchange services, broker-dealer services and those typically provided by futures commissions merchants.
FSOC puts forth several recommendations for regulators, including to “continue to enforce existing rules and regulations” but also for Congress and independent agencies to put forward laws and rules that address regulatory gaps.
One such gap is the market for digital assets that are not securities, like bitcoin. Because it’s not a security, the SEC doesn’t have direct oversight of bitcoin markets, and neither does the Commodity Futures Trading Commission, because its purview is derivatives markets, not commodity spot markets.
FSOC therefore recommends that Congress pass a law granting a regulator oversight of digital-asset commodity spot markets, as several bills being debated in Congress would do , as well as a law regulating the issuance of stablecoins.
The report also calls on Congress to expand each financial regulators’ ability to oversee all the operations of a company’s subsidiaries, even where existing law would prevent such access.
Such legislation could lead to crypto firms having to be overseen by half a dozen different federal regulators, but FSOC deems it necessary because of the need to “address regulatory arbitrage in a coordinated manner.”