There are hazardous gaps in how crypto is overseen, according to the latest annual report from the Financial Stability Oversight Council (FSOC) – restating a view that’s long been adopted by U.S. lawmakers, regulators and the industry itself.
The FSOC – a panel of U.S. financial agency chiefs that includes U.S. Treasury Secretary Janet Yellen, Federal Reserve Chair Jerome Powell and the heads of several other regulatory agencies – met Friday to discuss risks to the financial system and approve the council’s annual report. While echoing the same widely held concerns about an inability to reach into spot markets for tokens that aren’t securities, the report shared another common position: Only Congress can give the agencies the powers they need to establish a full set of rules that covers the whole crypto industry.
The report specifically recommended "legislation relating to regulators’ authorities to have visibility into and supervise the activities of all of the affiliates and subsidiaries of crypto-asset entities."
Yellen said risks from digital asset represent one of the "key priorities" in this year's report.
"We have seen significant shocks and volatility in the crypto assets system over the past year, including in recent months," she said.
The FSOC was built as the ultimate lookout for future financial tsunamis after the global mess in 2008. Officials were quick to point out that crypto’s current troubles don’t pose any current risk to the traditional system during the meeting. The Treasury document illustrated that point with the fresh example of industry turmoil caused by the collapse of the FTX crypto exchange, which left U.S. banking unscathed.
"The problems at FTX precipitated price decreases in bitcoin and other crypto-assets, but thus far have had a limited impact on the broader U.S. financial system," the document noted.
In a separate closed-door portion of the meeting, the regulators – including Gary Gensler, the head of the Securities and Exchange Commission (SEC), and Rostin Behnam, who runs the Commodity Futures Trading Commission (CFTC) – discussed the recent crypto market dramas. According to a summary of that conversation later released by the Treasury Department, the members are watching those developments closely and "spillovers to the traditional financial system have remained limited" so far.
"While the risks from the crypto markets generally do not appear to date to have spread to the traditional financial sector, we must remain vigilant to guard against that possibility," Gensler said in the open meeting. Already, he argued, the "largely non-compliant market" is putting individual investors at risk.
The annual report also flagged a topic that could be considered a legacy of FTX: Its campaign to cut out the middlemen in clearing crypto derivatives trades, including the proposal that customers’ positions could be closed out by an automated system. The council called for a closer look at the dangers that concept might pose, even though FTX’s proposal to the CFTC was dropped by the company when it collapsed.
The sentiments expressed in the latest annual report are similar to the much lengthier document released by the council in October at the behest of President Joe Biden’s executive order. That earlier report suggested Congress needs to soon pick an agency that will have power over the spot markets for bitcoin trading and any other cryptocurrencies that aren’t deemed securities. So far, most legislation favors the CFTC in that role.
UPDATE (Dec. 16, 2022, 17:01 UTC): Adds details from the report.
UPDATE (Dec. 16, 2022, 17:13 UTC): Adds congressional and FTX references from the report.
UPDATE (Dec. 16, 2022, 17:27 UTC): Adds comment from SEC's Gensler.
UPDATE (Dec. 16, 2022, 17:46 UTC): Adds comment from Treasury Department's readout on the closed-door session.
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