On Monday, a federal panel that is responsible for monitoring the risks to the financial system issued a warning about the cryptocurrency markets, stating that the widespread adoption of digital investments poses risks if the market continues to expand without proper oversight and enforcement. The warning was issued in reference to the cryptocurrency markets.
It is the first major report on cryptocurrencies to be produced by the Financial Stability Oversight Council, which would be led by the Treasury Department and was established after the financial crisis of 2008 to assist in identifying and mitigating threats to the financial system. This particular report focuses on cryptocurrencies.
The price of cryptocurrencies has been subject to erratic swings and the sector as a whole has suffered significant financial losses over the last few months, which has led to a heightened level of concern over the vulnerabilities of the cryptocurrency markets. The collapse of a single asset in May caused a downward spiral in pricing across the crypto markets, which in turn prompted a slew of bankruptcies, mergers, and layoffs in the sector. Additionally, many investors were left stranded since they were unable to access their assets.
When the market for cryptocurrencies exploded and managed to reach about $3 trillion in value around this time last year, government officials feared that speculation and insufficient oversight of activity involving digital assets could infect the larger system. As a result, they called for an assessment. Despite the fact that since then, almost $2 trillion in value has been wiped off, the threats are not any less serious today.
Existing laws already govern many of the actions that take place in crypto exchanges, as was frequently highlighted by the panel, which is comprised of the heads of all of the banking and financial authorities in the United States. The report recommended that Legislature provide regulatory agencies with more resources to police cryptocurrency and urged all agencies, including the Securities and Exchange Commission and the Commodity Futures Trading Commission, to prioritise crypto enforcement. Additionally, the report urged all agencies to prioritise crypto enforcement.
Stablecoins are cryptocurrencies that are nominally tied to the value of a stable asset such as the dollar. However, in practise, the value of stablecoins has sometimes been shown to be more volatile than promised. Stablecoins have been highlighted by regulators as one of the most imminent hazards to the whole financial system, making them a priority target for scrutiny. Stablecoins are a key bridge between new and traditional markets, and the volatility in crypto could lead to a bank run on these companies, potentially infecting wider markets. Issuers are mostly overseen by state regulators under a range of regimes, but stablecoins are a key bridge between new and traditional markets.
Additionally, the research suggests the passage of legislation in order to improve the regulation of cryptocurrencies and digital tokens such as Bitcoin and Ethereum, which do not expressly come within the purview of the Securities and Exchange Commission or any other body. The members of the Senate Committee on Agriculture, who are members of both political parties, only recently submitted a measure that tried to remedy this gap by extending power to the C.F.T.C. During a conference with reporters, officials from the Treasury Department refused to back any specific piece of legislation, saying instead that they are “heartened” by the efforts being made in Congress by members of both parties.
A new authority which would give Washington higher clarity across the entirety of crypto businesses is one of the things that regulators are calling for. This new authority would include the ability to look at various entities that seem to be disconnected from one another in order to better understand risks and conflicts.
It is noted in the report that many cryptocurrency exchanges and platforms add services by acquiring intermediaries without taking into consideration the conflicts and limits on business overlaps that exist in traditional finance. This raises stability risks and could be detrimental to investors. The report urges lawmakers to develop new regulations that address how cryptocurrency exchanges and platforms expand.
According to the findings of the report, particular aspects of cryptocurrencies have “acutely amplified instability” within the ecosystem of blockchain technology. These aspects include a lack of fundamental risk controls to protect against runs, an excessive availability of leverage, and prices that swing quickly and “appear to be primarily driven by speculation rather than grounded in current fundamental economic use cases.” Regulators are also concerned that the allegedly decentralised character of blockchain might be undermined by potentially dangerous links between crypto companies and a small number of concentrated suppliers of crucial services.
The authorities have high hopes that the publication would act as a roadmap for politicians and regulators as they try to build a more all-encompassing regulatory framework for the cryptocurrency markets.
The government, in contrast to the cryptocurrency sector, is not known for moving swiftly; but, industry watchers agree that the report, which specifies both broad principles and particular solutions, is a big step in the right direction.
According to Eswar Prasad, a professor at Cornell University and author of “The Future of Money,” who engaged with regulators as they put together the report, in it the F.S.O.C. recognises the increasingly centralised nature of an industry that promotes decentralisation and provides some of the clarity that blockchain businesses have been clamouring for. “This definitely puts us forward in the process.”