A major financial oversight body within the US government created in the wake of the financial crisis has identified bitcoin and distributed ledger systems in general as a potential systemic risk.
The Financial Stability Oversight Committee (FSOC) said in the new report released yesterday that the technology represented an innovation that “appear[s] poised for substantial near-term growth” and that it is reflective of a shifting landscape that merits attention from regulators.
As a broad recommendation, the committee said that regulators should prepare to adjust accordingly if the technology sees broader adoption or outright supplants certain market intermediaries. The issues identified focus on the lack of experience with these systems among participants in financial markets, exposing them to operational and fraud risks.
Beyond that, the FSOC said that the global nature of the technology – and the fact that it transcends legal jurisdictions and national boundaries – will potentially require regulatory cooperation on a similar scale.
The report notes:
The FSOC was created with the passage of the Dodd–Frank Wall Street Reform and Consumer Protection Act, which was drafted in response to the 2008-09 financial crisis. Signed into law in 2010, the bill was a controversial one, and to this day draws arguments that it either regulates the financial system too much or not enough.
The committee itself was given a broad mandate to investigate possible systemic risks, and according to the law, is empowered to designate market issues and take action against activities or market participants it deems an immediate risk to the US financial system.
The FSOC is currently chaired by the Treasury Secretary Jack Lew. Its voting members include Federal Reserve chair Janet Yellen as well as the heads of the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Comptroller of the Currency, among other agencies within the Treasury Department.
The report suggests that inexperience using the technology could result in deployment problems, and it went on to highlight scalability and fraud risks in particular.
It’s here that the committee specifically cited bitcoin, pointing to recent network capacity issues as an example of what might adversely affect a person or business new to the experience.
”Market participants have limited experience working with distributed ledger systems, and it is possible that operational vulnerabilities associated with such systems may not become apparent until they are deployed at scale,” the authors write.
The report continues:
This inexperience could expose some market participants to fraud as well, the report argues.
"Similarly, although distributed ledger systems are designed to prevent reporting errors or fraud by a single party, some systems may be vulnerable to fraud executed through collusion among a significant fraction of participants in the system," it states.
The need to adapt to a changing landscape, according to the report, is driven in part by the idea that market intermediaries with which regulators have worked and gathered information from could change or become obsolete.
For now, the FSOC writes, regulators should keep close watch, stating:
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.