Government report recommends “appropriate regulation” of cryptocurrency

A new report published by regulators and government advisors describes digital assets as a potential risk to the stability of the US financial system if their size or interrelationships with the traditional financial system grow without complying with “appropriate regulation.”

The Financial Stability Oversight Board released its 124-page report on digital assets today in response to US President Joe Biden’s March 9, 2022 executive order, “Ensuring the Responsible Development of Digital Assets.”

In September, the White House released its “comprehensive framework” for regulating and developing cryptocurrencies in the United States. The FSOC, which was created in 2010 with the passage of the Dodd-Frank Act, followed this up with a report on “Risks and Regulation of the Financial Stability of Digital Assets.”

“Since most crypto tokens are securities, this means that many crypto brokers are dealing with securities and must register with the SEC,” Gary Gensler, Chairman of the Securities and Exchange Commission (SEC) said of the report. and stock exchanges (SEC) in some capacity”.

US agencies – including the US Treasury, the Securities and Exchange Commission, and the Commodity Futures Trading Commission – have ramped up efforts to regulate digital assets over the past year, in what some in the space have called “regulation through oversight,” with worrying results.

“Digital assets have grown exponentially in size and scope in recent years,” Treasury Secretary Janet Yellen said in a statement regarding the report. They have attracted a significant amount of capital and interest from both private and institutional investors.

“At the same time, we have seen very significant shocks and volatility within the crypto-asset ecosystem, especially over the past year,” she continued. “Taking into account the potential for this type of instability, at our meeting in February, the Board identified digital assets as one of its main priorities for the year.”

Currently, the global cryptocurrency market capitalization is $981 billion, down from $2.2 trillion at the same time in October 2021, with a loss of $1.24 trillion, according to CoinGecko.

The report points out four main issues:

  • “Extremely severe instability within the crypto-asset ecosystem,” including a lack of risk controls to protect against operational risk or excessive leverage.
  • Prices are driven by speculation and not primary economic use cases
  • Repeat the large and wide decline.
  • Crypto tokens linked to entities with “risky business profiles and opaque liquidity and capital positions.”

The report also points out the risks and weaknesses of concentrating (centralizing) key services.

“This market is not that decentralized,” Gensler said. “We now see this industry populated by large, concentrated brokers, often a mix of services that would normally be separated from one another in the rest of the stock markets.”

In his statement, Gensler reiterated his view that most cryptocurrencies are securities. Gensler previously singled out bitcoin as an example of a crypto asset that is not a security and should be regulated under the Commodity Futures Trading Commission (CFTC).

“We cannot allow this market to undermine the broader capital markets or the economy,” he said.

The board recommends increasing compliance with existing regulations and closing regulatory loopholes, including increasing members’ ability to monitor, monitor and regulate cryptocurrency activities.

In addition, the board recommends the adoption of legislation that would give financial regulators authority over the spot market for digital assets that are not considered securities, as well as giving regulators the power to monitor the activities of all subsidiaries and affiliates of crypto-asset groups. And studying the potential vertical integration of crypto-asset companies.

Overall, these reports provide a solid foundation for policy makers as we work to reduce the risks of digital assets while realizing the potential benefits. They also provide a valuable addition to the public’s understanding of digital assets,” Yellen says.

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