FSOC, the Financial Stability Oversight Council, issued a warning that cryptocurrencies could endanger the financial system if their use or connections to conventional banking increase without oversight and regulation.
The FSOC stated in a new study released on Monday that “the rapid rise of digital asset activity, particularly stablecoins and lending and borrowing on digital assets trading platforms, is a key growing vulnerability.”
Potential decreases in asset prices, financial exposures between crypto businesses, financing mismatches and the possibility of runs, and the usage of leverage are all hazards to the financial system, according to the FSOC, which was established after the financial crisis to monitor threats to the financial system.
According to the report, many crypto-asset activities don’t follow the most basic guidelines to guard against run risks or discourage using a lot of leverage.
The regulation of crypto assets has significant flaws. Authorities assert that cryptocurrency companies can exploit regulatory vulnerabilities because there aren’t universal, consistent regulations in place for them.
According to the analysis, speculation appears to be the main factor influencing cryptocurrency asset values rather than existing core economic principles.
Stablecoins are considered to be the most important danger by the council. It consists of the leaders of the main federal financial regulatory agencies, including Treasury, the Federal Reserve, and the Securities & Exchange Commission.
Stablecoins are prone to runs, according to regulators, who have showed concern about them since last November. This is because they are not subject to capital and liquidity criteria.
A separate, less severe run on Tether, the largest stablecoin by market cap, followed the run on algorithmic stablecoin TerraUST this spring, according to officials.
Where stablecoin issuers have assets in the conventional financial system, authorities also see vulnerability. In line with them, traditional asset markets may see disruption if stablecoin activities were to take off and if runs on the traditional assets used to support the stablecoins—such as Treasuries or commercial paper—led to fire sales.
Limited direct federal monitoring of the spot market for crypto assets that are not securities is another area regulators cite as a glaring oversight deficit.
The report also urges regulatory bodies to continue enforcing current laws and regulations and working together to regulate cryptocurrency businesses like stablecoin issuers or crypto-asset platforms, particularly in situations where various players may be subject to various laws despite engaging in the same activities.
