FSOC warn cryptos could pose risks to the financial system without regulation and oversight

“The rapid growth of digital asset activities, including stablecoins and lending and borrowing on digital assets trading platforms, is an important emerging vulnerability.”

The government body in charge of keeping an eye on the risks to the financial system, the Financial Stability Oversight Council (FSOC), issued a warning about the markets for cryptocurrencies, stating that the widespread use of digital assets creates concerns if the sector expands without improved regulation and enforcement.

In response to U.S. President Joe Biden’s Executive Order “Ensuring Responsible Development of Digital Assets,” dated March 9, 2022, the Financial Stability Oversight Council published a 124-page report on digital assets. The FSOC which is headed by the Treasury Department and was established following the 2008 financial crisis to assist in identifying and mitigating vulnerabilities to the financial system, has released its first significant study on cryptocurrencies.

In a new report published on Monday, the FSOC said “the rapid growth of digital asset activities, including stablecoins and lending and borrowing on digital assets trading platforms, is an important emerging vulnerability.”

In order to do this, the Council advised Congress to enact regulations giving federal market authorities the authority to impose regulations on crypto asset markets that are not covered by current US securities laws. Conflicts of interest, unfair commercial practises, customer asset segregation, cyber security, and record-keeping should all be covered by the guidelines.

In a statement about the research, panel head and Secretary of the Treasury Janet L. Yellen said, “Digital assets have grown significantly in scale and scope over recent years, they have attracted a large amount of capital and interest from both retail and institutional investors.

“At the same time, we have seen very significant shocks and volatility within the crypto-assets system, particularly over the last year. With the potential for this kind of instability in mind, at our February meeting, the Council named digital assets as one of its key priorities for the year.”

The report also identified areas where authorities believe additional law is necessary, particularly for companies that issue stablecoins, a particular class of digital asset. Stablecoins are an important link between emerging and established countries, and the volatility of the cryptocurrency market could cause a bank run on these businesses, which could spread to other markets.

While traditional finance’s exposure to cryptocurrency activities was now small, the group of regulators added that it might “grow fast.” The use of stablecoins, leveraged trading, and asset custody are given as examples of how traditional finance and cryptocurrencies may be integrated.

Regulators are also requesting expanded powers that would enable Washington to have a clearer understanding of the entire crypto industry, including the capacity to examine numerous, seemingly unrelated firms in order to identify dangers and conflicts.

According to the study, the FSOC has not yet used this power to control the bitcoin market.

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