Unregulated Crypto Poses Dangers to the Financial System, Says FSOC

Key Takeaways:

  • Crypto asset operations “may pose threats” to the integrity of the U.S. financial system, according to a report by the Financial Stability Oversight Council of the U.S. Department of the Treasury.
  • This research gives policymakers a solid framework to reduce the risks to financial stability posed by digital assets while maximizing the potential advantages of innovation,

The Report on Digital Asset Financial Stability Risks and Regulation was made public by the Financial Stability Oversight Council (Council). In accordance with Section 6 of President Biden’s Executive Order 14067, “Ensuring Responsible Development of Digital Assets,” the Council decided to accept the report.

Regulators urged Congress to enact legislation to address the structural problems brought on by the rise of stablecoins, a type of cryptocurrency tied to the price of another financial asset, such as the US dollar or gold, as one of their seven main suggestions.

Secretary of the Treasury Janet L. Yellen said, “This report provides a sound framework for policymakers as we endeavor to limit the financial stability risks of digital assets while achieving the potential advantages of innovation.

In accordance with President Biden’s executive order, Treasury and our interagency partners have issued a series of studies, and this report is a significant addition to that set.

The research comes to the conclusion that the stability of the American financial system may be threatened by actions involving crypto assets, and it stresses the significance of effective regulation, including the execution of current laws.

It is crucial that all government actors collaborate to implement these recommendations.

The size of crypto-asset activities has dramatically grown during the past few years. Despite the fact that there are presently only a few connections to the conventional financial system, this number has the potential to grow quickly.

EU Financial Regulators have also warned consumers about the risks of crypto assets and claimed the investments are highly speculative and risky.

By offering a variety of services, such as leveraged trading and asset custody, to a variety of retail investors and traditional financial institutions, crypto-asset trading platforms may potentially have the potency for broader linkages.

Customers can now more easily access cryptocurrency-related activities, including those offered by some conventional financial institutions.

Additionally, a statement from Acting Comptroller of the Currency Michael J. Hsu stated that he had been paying close attention to the report’s suggestions for reducing regulatory arbitrage.

In order to avoid issues with “dangers that cut across jurisdictional lines,” he said it was critical that items like cryptocurrency be regulated in concert. These concerns include an uneven playing field and future increases in financial risks.

The volatility within the crypto-asset environment has been sharply enhanced by some aspects of crypto-asset activities.

Basic risk controls to guard against run risk or guarantee that leverage is not excessive are often absent from crypto-asset activity:

  • Prices for crypto assets have regularly seen dramatic and broad drops, suggesting that speculation rather than existing, core economic use cases, is the primary driver of these prices.
  • There are numerous connections between several crypto-asset businesses or activities and crypto-asset entities with dangerous business profiles and ambiguous financial and liquidity circumstances.
  • Although crypto-asset systems are dispersed, there may still be operational hazards due to the concentration of critical services or flaws in distributed ledger technology.

In order to prevent sudden and unpredicted shocks to economic or financial conditions from impairing the ability of the financial system to provide necessary services, such as the clearing of payments, the provision of liquidity, and the availability of credit, the Council aims to recognize and resolve vulnerabilities and flaws in the U.S. financial system.

Aadrika Sharma
Aadrika Sharma

I enjoy writing and try to learn new things every passing day!


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