Report from US Treasury risk watchdog calls for increased regulation of crypto assets

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The Financial Stability Oversight Council, a group of senior United States regulators chaired by Treasury Secretary Janet Yellen, released a report late Monday calling for Congress to pass multiple laws strengthening regulations on cryptocurrency assets and stablecoins.

The 124-page report on digital assets was released in response to President Bidens March 9, 2022, Executive Order, Ensuring Responsible Development of Digital Assets, which called for a wholistic government approach to addressing the risks and harnessing the potential of digital assets.

The regulators who assemble the panel warned legislators that unregulated cryptocurrencies could pose a risk to the US financial system and identified crypto assets such as stablecoins as well as lending and borrowing as emerging issues.

Stablecoins are a type of crypto asset that maintains one-to-one parity with another currency, such as the US dollar so that one coin is always $1. These tokens are often used as a way to ease trade between exchanges and simplify crypto funding.

The report concludes that crypto-asset activities could pose risks to the stability of the US financial system and emphasizes the importance of appropriate regulation, including enforcement of existing laws, Yellen said. It is vital that government stakeholders collectively work to make progress on these recommendations.

The council singled out the collapse of the TerraUSD stablecoin ecosystem and the domino effect that it triggered across the crypto industry as events that point towards instability that support its conclusions that increased transparency and regulation are needed for crypto-related businesses.

In May, Terraform Labs TerraUSD algorithmic stablecoin lost its peg to the US dollar, which caused its sister currency LUNA to lose 99% of its value in less than a week, wiping out the combined $60 billion dollars of Terras market.

The following implosion caused a ripple effect across the entire crypto industry and led to the bankruptcy of the Three Arrows Capital hedge fund, which had invested in TerraUSD. In turn, this led to further knock-on effects as more crypto lenders and brokers began to collapse as a market rout continued to claim victims including Voyager Digital, Celsius Network and Hodlnaut.

The digital asset ecosystem has seen rapid growth in recent years, with a market capitalization reaching $3 trillion last November, approximately 1% of global financial assets, according to the report. Up from $14 billion five years ago. However, crypto assets are also notoriously volatile, for example, the bitcoin market has fallen more than 70% from its all-time high of $68,000 in November to approximately $20,000 now.

The council recommended that legislators draft laws that provide financial regulators the ability to oversee the industry and urged existing regulators to use their current powers to delve deeper into baking institutions that have relationships with digital assets.

The report also called for increased direct federal oversight of the spot market for crypto assets that are not securities, such as bitcoin and Ethereum, which the report said strong rules could ensure transparent trading, avoid market manipulation and protect the economy.

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