The Financial Stability Oversight Council (FSOC), a key US financial stability watchdog, says there is an urgent need for Congressional intervention to regulate the cryptocurrency market in its latest annual report .
The FSOC’s report reviews the previous year’s developments in various sectors, including climate, banking, cybersecurity, and artificial intelligence.
Significantly, the council, which consists of the heads of major financial regulators has reiterated its previous stance on cryptocurrencies . It has urged Congress to enact specific legislation to regulate crypto spot markets and stablecoins.
The FSOC’s report highlights the council’s continued concern over the unregulated nature of the crypto market.
It calls for two legislative actions . First, it wants to grant federal financial regulators clear rulemaking authority over the spot market for non-securities crypto-assets. Secondly it recommends establishing a comprehensive framework for stablecoin issuers. This should address risks like market integrity, investor and consumer protection, and payment system stability.
The US House of Representatives currently has two bills pending that deal with these issues. These bills, propelled out of committee by Financial Services Committee Chair Patrick McHenry (R-NC), aim to create a regulatory framework for cryptocurrencies.
However, their fate remains uncertain, with it being unclear whether they will reach a Senate vote. Efforts to include crypto provisions in this year’s National Defense Authorization Act were unsuccessful.
Amid legislative uncertainty, the FSOC has indicated its readiness to take regulatory actions if Congress fails to enact comprehensive legislation.
The council has flagged various vulnerabilities within the crypto industry, including price volatility, excessive leverage, cybersecurity risks, and potential threats to investors and financial markets.
A case in point is the Curve Finance hack, where the DeFi protocol lost $50 million but later recovered 73% of these funds. Despite this recovery, the incident highlighted the fragility of loans backed by Curve’s native CRV token, exposing other DeFi platforms to substantial risks.
The FSOC report dedicates a significant subsection to stablecoins, a major concern for U.S. finance regulators. It outlines the potential systemic risks if a widely-used stablecoin faces a run. This could, it says lead to fire sales of the traditional assets backing it, such as bank deposits and Treasury securities. Additionally, the report turns its attention to non-bank financial institutions, which are increasingly active in the financial ecosystem, necessitating careful monitoring for potential risks.
In summary, the FSOC report underlines the urgent need for legislative action to address the growing concerns and vulnerabilities in the market. It emphasizes the need for regulatory frameworks for crypto spot markets and stablecoins to ensure financial stability and protect investors.
In its annual report , the FSOC also highighted the necessity of monitoring the rapid advancements in AI technologies, including generative AI, to ensure that regulatory and oversight frameworks are able to effectively address and stay ahead of potential risks to the financial system.
Treasury Secretary Janet Yellen, who also serves as the chair of the council, commented on this issue during a council meeting on Thursday. She highlighted that, as financial institutions explore and adopt new technologies, the integration of AI might increase rapidly. Yellen advocated for encouraging responsible innovation in this domain, acknowledging that it can offer benefits such as enhanced efficiency. She also stressed the importance of adhering to existing principles and regulations for risk management in AI..