U.S. regulators have asked Congress to address what they perceive are regulatory gaps in the crypto industry.
The Financial Stability Oversight Council (FSOC) recently recommended that Congress pass legislation to address the systematic risks various digital assets pose to the financial system.
The FSOC is a panel of financial regulators established under the Dodd-Frank Wall Street Reform and the Consumer Protection Act to comprehensively monitor the stability of the U.S. financial system.
One crypto organization in favor of “smart regulation” is the Blockchain Association.
“By establishing smart regulatory guardrails in which the industry can operate, the United States can continue to lead the world in crypto innovation,” Curtis Kincaid, director of communications for the Blockchain Association, told The Dallas Express.
“There is a misperception that the industry doesn’t want regulation – they do,” he said. Still, “it is important that any legislation is crafted to fit a new era of technology and not just to apply old rules onto new technology.”
The “Blockchain Association — and our more than 100 member companies — stand ready to work with Washington to develop balanced regulations that are fit for this purpose, considering the benefits and risks stablecoins present,” Kincaid said.
The particular digital currencies that the FSOC believes pose a risk to financial markets are stablecoins, a type of cryptocurrency designed for price stability. To achieve that stability, the price of certain stablecoins is pegged to a reference asset, such as a commodity or traditional currency.
“Not all stablecoins are the same, nor do they serve the same functions. You have collateralized stablecoins and non-collateralized stablecoins,” Kincaid explained, adding that the incident involving the collapse of the Terra network and its algorithmic stablecoin Luna back in May was triggered because the coin wasn’t backed by any real assets or collateral.
Monday’s call to legislators to bolster oversight and regulation of digital currencies is part of President Joe Biden’s Executive Order on Ensuring Responsible Development of Digital Assets. In addition to President Biden’s executive order signed earlier this year, his administration also published a series of reports in September that seek to address digital asset sector enforcement and regulatory loopholes.
“Innovation is one of the hallmarks of a vibrant financial system and economy, but as we’ve painfully learned from history, innovation without adequate regulation can result in significant disruptions and harm to the financial system and individuals,” Treasury Secretary Janet Yellen said last month in response to the Biden administration asking for government agencies to double down on the enforcement and risk identification of digital assets.
The three risk areas that the panel identified in a report following Monday’s meeting include limited oversight of the spot market for tokens that are not securities; opportunities for regulatory arbitrage, or taking advantage of favorable rules; and whether crypto firms should be allowed to integrate multiple services traditionally provided by intermediaries, like broker-dealers and clearing houses.
“I don’t see why someone would invest in something without a functioning business model,” Gust Kepler, founder and CEO of Dallas-based BlackBoxStocks Inc., a service-based platform for day trading stocks and options told The Dallas Express. Cryptocurrencies “don’t generate revenue through the sale of a product or service and they don’t report earnings.” To me, “It’s really the greater fool theory,” he said.
Even though regulation is necessary, Kepler doesn’t believe it’s the job of the Securities and Exchange Commission (SEC) to enforce.
“Banking regulations need to be there, but I’m not sure if it’s the place of the SEC,” he said. “Some regulatory authority needs to make sure there is a collateral reserve for each coin issued though.”
Monday’s FSOC report offers policymakers a recommended framework for how stablecoins might be regulated so the U.S. can maintain market integrity and consumer protection. The FSOC has previously attempted to convince congress to issue regulations around the issuance of stablecoins.
Congress has not commented on whether they will pass legislation addressing digital asset regulation, but several crypto-related bills have already been introduced.