FSOC reports on cryptocurrency systemic risks
On October 3, the Financial Stability Oversight Council (FSOC) released its Report on Digital Asset Financial Stability Risks and Regulation. As called for by Executive Order 14067, “Ensuring Responsible Development of Digital Assets” (covered by InfoBytes here), the report reviewed financial stability risks and regulatory gaps posed by various types of digital assets and provided recommendations to address such risks. Among other things, the report noted three gaps in the existing cryptocurrency regulatory framework: (i) limited direct federal oversight of the spot market for crypto-assets that are not securities; (ii) opportunities for regulatory arbitrage; and (iii) whether vertically integrated market structures can or should be accommodated under existing laws and regulations. The report stated that FSOC recommended that Congress pass legislation that would create “a comprehensive prudential framework for stablecoin issuers that also addresses the associated market integrity, investor and consumer protection and payments system risks, including for entities that perform services critical to the functioning of the stablecoin arrangement.” FSOC further recommended that the member agencies should follow several guiding principles, including “same activity, same risk, same regulatory outcome,” and “technology neutrality.” The report also requested that agencies consider whether “vertical integration” or other business models where retail customers can directly access markets instead of going through a broker-dealer “can or should be accommodated.” The report noted that if banks “scale up their participation in the crypto-asset ecosystem, such activity could potentially entail much greater access to the crypto-asset market by a broad range of institutional investors, corporations, and retail customers than currently exists.” The U.S. Treasury Department released a Fact Sheet summarizing the report’s key findings and recommendations.
Treasury Secretary Janet Yellen noted in a statement that the “report adds to analysis of digital asset issues that have been covered in other recent reports, including on the future of money and payments; consumers and investor protection; illicit finance; and a framework for international engagement.” Acting Comptroller of the Currency Michael J. Hsu released a statement supporting the report, emphasizing that “it is critical for the Council and Congress to prioritize Recommendation 4 regarding interagency coordination, Recommendation 5 regarding a federal prudential framework for stablecoin issuers, and Recommendation 6 regarding regulatory visibility and authorities over all of the activities of crypto-asset entities.” SEC Chair Gary Gensler also expressed his support in a statement, noting that he looks “forward to working with Congress to achieve our public policy goals, consistent with maintaining the regulation of crypto security tokens and related intermediaries at the SEC.” Texas Banking Commissioner and FSOC state banking representative Charles G. Cooper released a statement of support through the Conference of State Bank Supervisors saying that the report should “inform the work that we do as individual agencies and on an interagency basis to balance responsible innovation with safeguarding our financial markets and consumers.”CFPB Director Rohit Chopra released a statement, noting that “agencies have already taken steps to address discrete issues related to deposit insurance misrepresentation and to lay groundwork to address concerns related to fraud, hacks, and scams,” and emphasized the need “to tackle broader risks to the financial system.”