Financial Stability Council recommends crypto spot market regulator, stablecoin legislation – Ledger Insights
Yesterday, the US Financial Stability Oversight Council (FSOC) published a report on Digital Asset Financial Stability Risks and Regulation. It identified three regulatory gaps and made several recommendations.
The first problem is that cryptocurrencies, which are not classified as securities, lack a direct regulator. Therefore, it proposes that Congress pass legislation to close this gap. While not suggesting which regulator is appropriate, the report notes that the Commodity Futures Trading Commission (CFTC) is primarily experienced in dealing with wholesale markets as opposed to retail investors.
While the CFTC has responsibility for crypto derivatives, it can only take enforcement action in the cash market if there is manipulative or fraudulent behavior, but it is not the cash market’s supervisor or regulator. The report was careful to classify Bitcoin as a non-security crypto-asset, referring to “possibly other crypto-assets that are not securities.”
Meanwhile, Congress has already taken steps in that direction with Senator Stabenow’s proposal for a bill to regulate digital goods like Bitcoin, the Digital Commodities Consumer Protection Act, which has already been considered by the Senate Agriculture Committee.
The second regulatory gap is regulatory arbitrage and lack of oversight by any regulator over a cryptocurrency platform that may have multiple subsidiaries.
Third, most cryptocurrency exchanges and other platforms deal directly with retail investors. Not only does this raise questions of consumer protection, but also issues of financial stability. With conventional assets, it is a shared activity between exchange and broker dealers. The greatest risk is associated with leverage, which is typically offered by broker-dealers rather than the stock exchange. FSOC is concerned with influence on crypto exchanges.
“Automated liquidations without appropriate regulatory safeguards are likely to be pro-cyclical, exacerbating balance sheet problems at a time of declining asset values and potentially creating a cascade of automated liquidations,” the report said.
The CFTC has already begun exploring the topic of exchanges that trade directly with the public, following a submission from FTX US, which holds a derivatives license through its subsidiary LedgerX.
Yesterday’s FSOC report makes ten recommendations, including ongoing enforcement. We did not see a requirement for clarity about which cryptoassets are considered securities, and it would not be a stability issue anyway.
The best recommendations were:
- pass legislation to provide oversight over spot markets for cryptocurrency
- legislation on stablecoins
- legislation that allows a regulator to have oversight over an entire crypto platform, including visibility and oversight of subsidiaries and affiliates
- service provider regulation
- to study the potential vertical integration of crypto-asset platforms.
FSOC’s ten voting members include the heads of all the major financial regulators, including the Treasury Department, Federal Reserve, SEC, CFTC, OCC, FDIC.
