The Treasury Department will warn the White House that cryptocurrencies could pose significant financial risks that outweigh the benefits unless the government rolls out major new regulations, according to two people familiar with the matter.
Treasury to warn White House that cryptocurrency needs regulation
Treasury’s reports will highlight the financial danger of cryptocurrencies in several key areas, including the fraud risk they pose to investors, the two people familiar with the matter said, speaking on condition of anonymity to discuss the reports before they are made public. Treasury’s assessments conclude that cryptocurrencies do not yet pose a stability risk to the wider financial system – but that the situation could change rapidly.
One of the reports will focus specifically on the financial dangers posed by stablecoins, a form of cryptocurrency that is theoretically tied to the value of the U.S. dollar, the people said. Treasury asked Congress last fall to give banking regulators new authority to monitor these digital tokens, but lawmakers have yet to agree on how to do so. Meanwhile, the collapse of a $60 billion stablecoin project called Terra this spring helped accelerate a broader crypto market downturn that is underway.
Lawmakers are considering forcing the government to write federal rules for the industry, as crypto interests have poured money into a lobbying campaign to shape the debate. The sector is pushing to establish the Commodity Futures Trading Commission as its primary regulator, believing it to be friendlier than the Securities and Exchange Commission would be. So far, the industry appears to be winning: Three bipartisan bills introduced this year all codify a lead role for the CFTC.
It was not immediately clear how the Treasury would weigh in on that issue — or others who share crypto interests and consumer and investor advocates. A spokesman for the Ministry of Finance declined to comment.
“Treasury is trying to create the analytical foundation for very strong oversight of this financial sector,” said one of the people familiar with the matter. “They also hope that with these types of reports, it will be difficult to have regulations that back away from strict oversight of the industry. This framework will serve as a benchmark, to say “Let’s focus on these risks and not get carried away by the technology and the promises of the industry.” “
The reports respond to an order President Biden signed in March for a comprehensive review of the federal government’s approach to digital assets, from their environmental impact to their potential to promote financial inclusion. At the time, industry leaders said they were encouraged by the development, framing it as recognition of the sector’s resilience by the most powerful voice in Washington.
Yet Treasury Secretary Janet L. Yellen has been a frequent skeptic of crypto, despite trying to emphasize that it can result in meaningful new innovations. Her department recently drew First Amendment complaints from the industry when it imposed sanctions on a crypto-anonymization program known as Tornado Cash, a tool of choice for North Korean hackers. Treasury officials’ push for new requirements also complicated a bipartisan House effort to introduce a new regulatory regime for stablecoins, according to a CoinDesk report earlier this month.
Mark Hays, who specializes in crypto issues for Americans for Financial Reform, a left-leaning group, said Treasury officials have met with a number of groups, including his, about the upcoming reports. Hays cited Federal Trade Commission data showing that $1 of every $4 reported lost to fraud was paid in cryptocurrency. Consumers have reported more than $1 billion lost to crypto from January 2021 to March 2022, Hays said, citing the FTC data.
“We’re basically seeing a predatory model similar to what we saw in the run-up to the 2008 financial crisis,” Hays said. “We hope the report finds a way to communicate the scope and severity of the potential harm.”
Dave Grimaldi, head of government affairs for the Blockchain Association, an industry lobby group, praised the administration for ordering the review. “Conducting a scan of the entire federal government to determine where jurisdiction lies for a new technology with a large consumer impact is [a] smart process,” he said. “The White House understands that the winds of change are blowing toward decentralized payment systems and away from traditional and institutional finance as we know it.”
Tyler Gellasch, president and CEO of the investor advocacy organization Healthy Markets, said he is skeptical that the report will suggest a tough approach.
“Many practices in the crypto industry are simply illegal in the securities markets, so avoiding the SEC’s rules is critical to the crypto industry’s bottom lines,” he said. “If the report recommends giving the CFTC new authority over spot trading in digital assets, as many expect, we don’t expect to see public celebrations, but there will still be a big sigh of relief from K Street to Silicon Valley to China.”
