The United States Treasury has proposed regulation clarity for spot markets and stablecoins according to recommendations made in the Financial Stability Oversight Council (FSOC) Report on Digital Asset Financial Stability Risks and Regulation.
According to the report published after the FSOC meeting on Monday, the regulatory body asked the U.S. Congress to pass legislation to address the risks digital assets pose to the financial system. The FSOC is a regulatory panel in the U.S. composed of top financial regulators. It fell under the Department of the Treasury and was established to mitigate financial risk following the global crisis witnessed in 2008.
Regulators in the U.S. and worldwide are under a lot of pressure to regulate the crypto space following the turmoil caused by the collapse of the multi-billion algorithmic stablecoin project Terra UST in May. Focus has shifted towards regulating the crypto sector after the Terra UST/LUNA catastrophe caused multiple bankruptcies and a burgeoning sell-off in the crypto market. The implosion also caused losses for many investors spread across different countries of the world.
The panel mentioned the impacts of the now-bankrupt cryptocurrency hedge fund Three Arrows Capital (3AC) to support the case of vulnerabilities due to extensive interconnections among crypto market players. With that, they concluded that the absence of a consistent and comprehensive regulatory framework in the crypto-asset business makes it easy for players to skirt regulations by shifting business operations to multiple affiliates and subsidiaries operating under varying regulatory frameworks.
The Need for New Regulatory Guidelines
The panel unanimously approved the proposal before the Monday, October 3 announcement, citing the need for bills to improve oversight in the cryptocurrency spot market and stablecoins. According to the FSOC, the lack of clear regulations in the crypto sector could pose a risk to the general financial stability of the U.S., hence the need for a new regulatory framework.
Earlier this year, United States President Joe Biden gave an executive order to “Ensure Responsible Development of Digital Assets.” Using this as the launchpad, the FSOC panel identified three gaps in crypto regulation:
“Limited oversight of the spot market for tokens that are not securities; opportunities for regulatory arbitrage, or taking advantage of favorable rules; and whether crypto firms should be allowed to integrate multiple services traditionally by intermediaries such as broker-dealers and clearing houses.”
Speaking during an interview, Treasury Secretary Janet Yellen said:
“The FSOC report provides a strong foundation for regulators to mitigate the financial stability of digital assets while realizing the potential benefits due to innovation.”
The Monday report included several new recommendations for legislators. Among what was cited was the need to develop a federal structure for stablecoin issuers to address market integrity and consumer protection.
The panel also wants Congress to pass a bill to confer legislation mandate to federal financial regulators. This comes as the FSOC believes federal financial regulators should be able to make laws on spot markets for cryptocurrencies that are not securities. According to the FSOC, this will help address conflicts of interest while discouraging abusive trading practices.
The report adds that legislators should also think about rulemaking where regulators can oversee the activities of cryptocurrency company affiliates and subsidiaries. The regulatory panel says that such a move would address regulatory arbitrage.
Treasury Secretary Yellen explained during a Monday hearing that it is essential for government stakeholders to join hands in making progress on these recommendations. She said:
“Innovation without adequate regulation can result in significant disruptions and harm to the financial system and individuals.”
The FSOC also called for legislation to address digital assets’ risks to the financial system, highlighting that the Council maintains readiness to address said risks should it deem any implemented legislation insufficient.
This is not the first time the FSOC sermons Congress on asset regulation. The regulatory panel has previously encouraged Congress to regulate stablecoin issuers like banks. In September, there was another slate of reports about executive orders from the White House.
President Biden has recommended that the U.S. government agencies continue enforcing the digital asset sector, identifying vulnerabilities in regulation. While there is still no clarity on when Congress may implement crypto-based legislation, several bills have already been presented on the issue of regulating stablecoins and digital commodities.