October 3, 2022

Treasury issues report on digital assets

The Financial Stability Oversight Council of the US Department of the Treasury has released and approved its Report on Digital Asset Financial Stability Risks and Regulation, pursuant to Executive Order 14067.  The report examines the risks and regulatory issues posed by digital assets.  It emphasizes the need for regulation of the interconnections between traditional financial systems and crypto assets, examines the existing regulatory structure, and addresses gaps in the existing regulatory system.

The characteristics of crypto-asset activities that contribute significantly to instability within crypto-asset systems are:

  • The lack of run risk and the lack of protections against excessive leverage demands
  • The lack of principled economic use analysis in crypto-asset pricing, and the consequent risk of steep declines
  • The proliferation of crypto-asset entities that have risky business profiles
  • Operational risks resulting from the concentration of key services, or from the use of distributed ledger technology.

According to the report, enforcement of the existing regulations is an important step toward controlling the financial stability risks.  Recent enforcement actions have targeted illegally offered crypto-asset derivatives products, failure to comply with broker-dealer or exchange registration requirements, false and misleading statements, and fraud.

Significantly, the report identifies three gaps in the existing regulatory system:

  1. Inadequate direct federal regulation of spot markets for crypto-assets that are not securities;
  2. Lack of a comprehensive regulatory framework for crypto-asset businesses as a whole, and;
  3. The problems posed by vertically integrated trading platforms, in terms of investor protection and financial stability.

The report recommends that these gaps be addressed through the passage of appropriate legislation, and that measures be taken to address regulatory arbitrage, in addition to further study of the consequences of vertical integration by crypto-asset firms.

US Dept of the Treasury press release | Report | Fact Sheet