WASHINGTON (MaceNews) – The Financial Stability Oversight Council of government regulators, including Treasury and the Federal Reserve, Monday recommended Congress consider additional guardrails for the crypto industry, increased enforcement of existing regulations and enhanced cooperation among the agencies, stopping short of endorsing any particular legislative measures currently being offered.
In comments during the afternoon meeting, SEC Chair Garry Gensler said he could anticipate digital asset firms being forced to register with both his agency and the CFTC. The CFTC Chair agreed.
Gensler also noted widespread non-compliance with existing regulations among digital asset firms and said the majority of stablecoins are securities covered by SEC regulations.
The following are excerpts from the 120-page FSOC report on digital asset financial stability risks and regulation unanimously approved Monday afternoon by FSOC members and subsequently published:
Crypto vulnerabilities include: excessive leverage, elevated asset valuations, funding mismatches, and risk of runs.
Crypto-asset activities could pose risks to the stability of the U.S. financial system if their interconnections with the traditional financial system or their overall scale were to grow without adherence to or being paired with appropriate regulation, including enforcement of the existing regulatory structure.
Many crypto-asset activities lack basic risk controls to protect against run risk or to help ensure that leverage is not excessive. Crypto-asset prices appear to be primarily driven by speculation rather than grounded in current fundamental economic use cases, and prices have repeatedly recorded significant and broad declines.
Despite the distributed nature of crypto-asset systems, operational risks may arise from the concentration of key services or from vulnerabilities related to distributed ledger technology. These vulnerabilities are partly attributable to the choices made by market participants, including crypto-asset issuers and platforms, to not implement or refuse to implement appropriate risk controls, arrange for effective governance, or take other available steps that would address the financial stability risks of their activities.
Certain crypto-asset platforms may be listing securities but are not in compliance with exchange or broker-dealer registration requirements. In addition, certain crypto-asset issuers have offered and sold crypto-assets in violation of federal and state securities laws, because the offering and sale were not registered or conducted pursuant to an available exemption.
Though the existing regulatory system covers large parts of the crypto-asset ecosystem, this report identifies three gaps in the regulation of crypto-asset activities in the United States.
First, the spot markets for crypto-assets that are not securities are subject to limited direct federal regulation. As a result, those markets may not feature robust rules and regulations designed to ensure orderly and transparent trading, prevent conflicts of interest and market anipulation, and protect investors and the economy more broadly.
Second, crypto-asset businesses do not have a consistent or comprehensive regulatory framework and can engage in regulatory arbitrage. 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.
Third, a number of crypto-asset trading platforms have proposed offering retail customers direct access to markets by vertically integrating the services provided by intermediaries such as broker-dealers or futures commission merchants. Financial stability and investor protection implications may arise from retail investors’ exposure to certain practices commonly proposed by vertically integrated trading platforms, such as automated liquidation.
Recommendations include: the consideration of regulatory principles, continued enforcement of the existing regulatory structure, steps to address each regulatory gap, and bolstering member agencies’ capacities related to crypto-asset data and expertise.
The Council has identified three gaps in the regulation of crypto-asset activities in the United States:
• limited direct federal oversight of the spot market for crypto-assets that are not securities;
• opportunities for regulatory arbitrage; and
• whether vertically integrated market structures can or should be accommodated under existing laws and regulations.
—
The Council recommends the passage of legislation providing for rulemaking authority for federal financial regulators over the spot market for crypto-assets that are not securities (part 5.3.1); steps to address regulatory arbitrage including coordination, legislation regarding risks posed by stablecoins, legislation relating to regulators’ authorities to have visibility into, and otherwise supervise, the activities of all of the affiliates and subsidiaries of crypto-asset entities, and appropriate service provider regulation (part 5.3.2); and study of potential vertical integration by crypto-asset firms (part 5.3.3). Finally, the Council recommends bolstering its members’ capacities related to data and to the analysis, monitoring, supervision, and regulation of crypto-asset activities .
—
Content may appear first or exclusively on the Mace News premium service. For real-time delivery in entirety contact tony@macenews.com. Twitter headlines @macenewsmacro.