Why would we need Stricter measures?
Digital assets could pose a risk to the stability of the U.S. financial system, according to a recent analysis by government regulators and consultants, if their scale or ties to the established financial system were to increase without adhering to proper regulation. In response to U.S. President Joe Biden's Executive Order (1) "Ensuring Responsible Development of Digital Assets, the Financial Stability Oversight Council today produced a 124-page report on digital assets.
The White House unveiled its "Comprehensive Framework" in September for crypto development and regulation in the U.S. The Dodd-Frank Act, which established the FSOC in 2010, was followed by the report on "Digital Asset Financial Stability Risks and Regulation."
"Since most cryptocurrency tokens are securities, many crypto intermediaries must register with the Securities and Exchange Commission (SEC) in one way or another since they deal in securities. "Speaking about the findings, SEC Chair Gary Gensler.(2)
The U.S. Department of Treasury, the Securities and Exchange Commission, and the Commodity Futures Trading Commission, among other U.S. authorities, have increased their attempts to regulate digital assets over the past year, in what some in the industry have dubbed regulation by enforcement with onerous outcomes.
"Digital assets have greatly expanded in size and scope in recent years", according to a statement made by Janet Yellen, current Secretary of the Treasury. (3)
They have drawn substantial funding and attention from both individual and institutional investors. According to CoinGecko (4), the worldwide cryptocurrency market valuation is currently $981 billion, down from $2.2 trillion at the same time in October 2021, a loss of $1.24 trillion.
What Exactly is causing these issues?
The Report (5) identified three major problems:
(1) The crypto-asset ecosystem has experienced "acutely magnified volatility," which includes an absence of risk controls to guard against run risk or undue leverage.
(2) Tokens connected to cryptocurrencies have "risky company characteristics and opaque capital and liquidity positions."
(3) The risk of concentrating (centralizing) important services and vulnerabilities is also mentioned in the report.
The Council suggests tightening existing legislation, filling regulatory loopholes, and enhancing member capacities for overseeing, monitoring, and regulating cryptocurrency-related activity. The Council also urges the adoption of legislation that would grant financial regulators control over and the power to monitor the operations of all affiliates and subsidiaries of crypto-asset companies and research potential vertical integration by crypto-asset firms.
"All told, these studies give policymakers a solid framework to build as we attempt to reduce the dangers associated with digital assets while maximizing their potential advantages. Additionally, they contribute significantly to the public's knowledge of digital assets," said Yellen.