In a new report, the Financial Stability Oversight Council (FSOC), a regulatory panel comprising leading financial regulators, identified areas in crypto regulation with:
limited oversight of the spot market for tokens that are not securities;
opportunities for regulatory arbitrage, or benefit favorable rules;
if crypto firms should be allowed to integrate multiple services traditionally offered by intermediaries, such as broker-dealers and clearing houses.
More Power to Top Wall Street Watchdogs
The report was published after US President Joe Biden’s executive order this year, in which the Treasury and other top regulators asserted that the government has limited ability to regulate sections of the asset class that do not fall under securities laws.
The FSOC proposed several recommendations for legislators, including the creation of a federal framework for stablecoin issuers to address market integrity and consumer protection.
The Securities and Exchange Commission (SEC) has claimed the territory over assets that are considered securities, while the Commodity Futures Trading Commission (CFTC) is in charge of supervising derivatives on crypto. A wide range of subjects is not under the regulatory purview of any agencies.
Hence, the FSOC, which includes the SEC chair and CFTC head, is eyeing a bigger piece of the crypto regulatory action. As such, the council has suggested that Congress should also provide the federal financial regulators rulemaking authority to weigh in on a myriad of areas such as conflicts of interest, abusive trading practices, recordkeeping requirements, segregation of customer assets, and cybersecurity.
To address regulatory arbitrage, The FSOC believes Congress could give more power to the regulators to oversee the activities of crypto firms’ affiliates and subsidiaries.
During a virtual meet, Treasury Secretary Janet Yellen stated that the report “provides a strong foundation for policymakers” towards mitigating “the financial stability risks of digital assets while realizing the potential benefits of innovation.”
The FSOC has also highlighted the need for regulators to weigh in on the potential impact of retail customers’ direct access to digital-asset markets as the CFTC currently reviews a proposal from FTX.US that seeks to eliminate the middleman from Bitcoin and Ether futures trading.
The report addressed funding requirements for agencies regulating crypto activities and recommended more power to the Federal Housing Finance Agency and the National Credit Union Administration to take enforcement action against entities offering crypto-related services to banks.
Last month, the Biden administration called for regulation and stringent oversight of crypto while identifying gaps in regulations. The White House said the President was considering the amendment of the Bank Secrecy Act (BSA) to accommodate crypto exchanges, NFT platforms, and other associated entities under its purview.