The US Risk Watchdog has asked Congress to appoint a cryptocurrency spot market regulator.
In response to President Joe Biden’s executive order, the Treasury-led FSOC has called for greater regulatory reach into markets, crypto firms’ affiliates, and outside service providers.
In a report that was unanimously approved by the Financial Stability Oversight Council (FSOC) on Monday, the top US financial regulators warn of dangerous gaps in crypto oversight and ask Congress for more power, such as deciding which agency will oversee most trading in bitcoin and other non-security tokens.
The council’s report highlights several unregulated risks in the digital asset industry, including the bitcoin spot market (BTC). The group’s latest recommendations, led by Treasury Secretary Janet Yellen, effectively strengthen the two leading efforts in crypto legislation: one that would put the Commodity Futures Trading Commission (CFTC) in charge of overseeing the spot market and another that would establish rules for stablecoin issuers.
“Innovation without adequate regulation could lead to significant disruptions,” Yellen said at the council’s meeting on Monday. She said that the report “points out a number of regulatory gaps” and comes to the conclusion that crypto assets “may threaten financial stability.”
According to a staff presentation at the meeting, the 125-page FSOC document concluded that potential fraud and manipulation in crypto trading calls for a spot market watchdog. Legislation introduced in both the Senate and the House would establish the CFTC in that capacity, though the bills would leave it up to the Securities and Exchange Commission (SEC) to determine which tokens are “securities” over which it will have jurisdiction.
The FSOC, whose members include the heads of financial agencies such as the Federal Reserve, the SEC, and the CFTC, is also preparing to recommend that US regulators have access to all aspects of digital businesses. They must be able to supervise not only a crypto firm, but also all of its affiliates and key service providers, just as the Fed can do with Wall Street banks, according to the report, which will ask Congress to grant that authority.
The report, as expected, calls on Congress to “create a comprehensive federal prudential framework for stablecoin issuers,” allowing regulators to put up barriers around the tokens that are so important to current crypto trading and future payment ideas. A prominent bill in the House Financial Services Committee is attempting to accomplish this.
This is the latest-and most anticipated-document to emerge from President Joe Biden’s executive order directing federal regulators to develop plans for overseeing cryptocurrency. While the FSOC will reiterate that US financial regulators have broad authority over much of the industry, the report’s recommendations heavily rely on Congress to step in and address many of the government’s shortcomings. However, the current congressional session is coming to an end, and lawmakers will turn their attention to the upcoming midterm elections, which will reshape Congress. As a result, any reliance on the legislative branch could be a long-term project.
“Regardless of what the crypto industry initially expected or what certain market participants may say today,” SEC Chairman Gary Gensler said on Monday, adding that the policies must protect consumers and financial stability while also protecting against illegal activity. “These public policy goals are the same whether you call it a crypto token, a stablecoin, or a decentralized finance platform (DeFi),” he said.
In its recommendations, the FSOC also took aim at FTX’s plan to let its customers trade crypto derivatives without going through traditional middlemen.
According to the FSOC, the crypto industry has been picking and choosing regulators, or ignoring them entirely.
According to the report, “crypto-asset entities do not have a consistent or comprehensive regulatory framework and can take advantage of gaps in the regulatory system and engage in regulatory arbitrage.” It went on to say that agencies should use their existing authority and work together to prevent the industry from picking and choosing which rules to follow and which regulators to deal with.
In its recommendations, the FSOC also took aim at FTX’s plan to let its customers trade crypto derivatives without going through traditional middlemen.
“A number of firms have proposed to offer vertically integrated services so that retail customers can directly access markets,” the report stated, but did not mention FTX’s very public proposal, which is currently being considered by the CFTC. The FSOC is worried that customers’ positions with too little margin could be closed out automatically at any time. This, it says, “creates the potential for cascading liquidations and less room for human intervention during times of stress.”
The council said that its members need to look into “vertical integration” in more depth and decide if the structure “can or should be allowed under current laws and rules.”