Crypto-assets could threaten the stability of the U.S. financial system without regulators enforcing current regulations and being granted more power over the space, according to a recent report from the Financial Stability Oversight Council.
The council, composed of the leaders of the Treasury Department, Federal Reserve and Securities and Exchange Commission, issued 10 recommendations, including that regulators enforce current regulations; and that Congress allow for regulators to have “explicit rulemaking authority” over the spot market for non-security crypto-assets and for regulators to supervise the activities of affiliates and subsidiaries of crypto-asset firms.
The report also calls on regulatory agencies to work together to supervise crypto-asset firms and calls for the creation of a federal regulatory framework for stablecoin issuers. The FSOC noted that requiring crypto-asset firms to register as a broker-dealer would subject a crypto-asset intermediary to the Financial Industry Regulatory Authority and any other exchange the broker-dealer could take part in.
Acting Comptroller of the Currency Michael Hsu expressed support for several of the recommendations. “Properly implementing these recommendations will help mitigate regulatory arbitrage and, thus, risks to financial stability,” he said.
The recommendations come as the FSOC claims that some crypto-asset platforms listed as offering securities are not complying with related exchange or broker-deal registration requirements.
“Many crypto-asset activities lack basic risk controls to protect against run risk or to help ensure that leverage is not excessive,” the FSOC stated. “Crypto-asset prices appear to be primarily driven by speculation rather than grounded in current fundamental economic use cases.
The Basel Committee on Bank Supervision has proposed using a system to classify crypto-assets into groups with capital and liquidity requirements reflecting their respective risks.
The report is the latest example of federal regulators expressing wariness over the crypto market and central bank digital currencies. Earlier this year, the Financial Stability Board found that the rapid growth of the crypto industry could threaten global financial stability. The FSB cited the markets’ scale, increasing interconnectedness with the traditional financial system, and structural vulnerabilities in its assessment.
A team of economists from the Federal Reserve Bank of New York said in February that stablecoins will not be an effective payment source, even when completely backed by liquid assets. This summer, the Federal Reserve said in a supervisory letter that board-supervised banks looking to undertake crypto-related activities should first ensure doing so is legal and have “adequate systems and controls in place” before banking crypto. Banks should also ensure that their operating systems cover crypto-related operational risks — the increased chance of falling victim to hacking, fraud, theft and third-party relationships; financial, legal and compliance risks relating to anti-money laundering and third-party relationships; and other challenges.
Some banks are already serving the crypto industry. Last year, Tulsa, Okla.-based Vast Bank became the first nationally-chartered, FDIC-insured bank to allow customers to buy, sell and hold cryptocurrencies through its user interface. JPMorgan Chase, Morgan Stanley and Goldman Sachs have dedicated groups for cryptocurrency and its underlying blockchain technology. JPMorgan has more than 200 employees working in its Onyx division.