Report from the US Treasury risk watchdog calls for increased regulation of crypto assets
The Financial Stability Oversight Council, a group of senior U.S. regulators led by Treasury Secretary Janet Yellen, released a report late Monday calling on Congress to pass more laws strengthening regulation of cryptocurrency assets and stablecoins.
The 124-page report on digital assets was released in response to President Biden’s March 9, 2022, Executive Order, “Ensuring the Responsible Development of Digital Assets,” which called for a whole-of-government approach to “address the risks and harness the potential of digital assets.”
The regulators composing the panel warned lawmakers that unregulated cryptocurrencies could pose a risk to the US financial system and identified cryptoassets such as stablecoins as well as lending and borrowing as emerging problems.
Stablecoins are a type of cryptoasset that maintains one-to-one parity with another currency, such as the US dollar, so that one coin is always $1. These tokens are often used as a way to facilitate trading between exchanges and facilitate crypto financing.
“The report concludes that crypto-asset activities may pose a risk to the stability of the US financial system and underscores the importance of appropriate regulation, including enforcement of existing laws,” Yellen said. “It is important that government stakeholders work collaboratively to move forward with these recommendations.”
The council pointed to the collapse of the TerraUSD stablecoin ecosystem and the domino effect it triggered in the crypto industry as events that point to instability supporting the conclusions that increased transparency and regulation is needed for crypto-related businesses.
In May, Terraform Labs’ TerraUSD “algorithmic” stablecoin lost its peg to the US dollar, causing its sister currency LUNA to lose 99% of its value in less than a week, wiping out the combined $60 billion in Terra’s market.
The ensuing implosion caused a ripple effect throughout the crypto industry and led to the bankruptcy of the Three Arrows Capital hedge fund, which had invested in TerraUSD. In turn, this led to further ripple effects as several crypto lenders and brokers began to collapse as a market rout continued to claim victims including Voyager Digital, Celsius Network and Hodlnaut.
The digital asset ecosystem has seen rapid growth in recent years, with a market value reaching $3 trillion last November, about 1% of global financial assets, according to the report. Up from $14 billion five years ago. However, cryptoassets are also notoriously volatile, for example the bitcoin market has fallen more than 70% from a high of $68,000 in November to around $20,000 now.
The council recommended lawmakers draft laws that would give financial regulators the ability to oversee the industry and urged existing regulators to use their current powers to delve deeper into banking institutions that have relationships with digital assets.
The report also called for increased direct federal oversight of the spot market for non-securities cryptoassets such as bitcoin and Ethereum, which the report said could ensure transparent trading, avoid market manipulation and protect the economy.
