Treasury financial stability watchdog says fraud is rampant in digital currency markets

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The cryptocurrency market is plagued by fraud, non-compliance with governing laws and wild swings in volatility, but the recent implosion of digital currency exchange FTX has not hindered the broader financial system, according to a report released Friday by the Treasury’s financial stability watchdog. Committee.

“FTX is a shock to this market,” a Treasury official said, adding that the bankruptcy underscores the committee’s concern over crypto highlighted in a report released in October.

The committee, which was created after the financial crisis to identify imminent risks to the financial system, reiterated its call for Congress to pass legislation allowing US regulators to control crypto-asset markets that are not securities.

The council also said lawmakers must tackle regulatory arbitrage, when companies take advantage of more favorable or lighter regulation in multiple jurisdictions to circumvent tighter oversight in the United States.

The group uses data from the Consumer Financial Protection Bureau, Federal Trade Commission, and Securities and Exchange Commission, among other agencies, to shine a light on crypto fraud. Of 8,300 crypto complaints received by the CFPB Consumer Complaint Database between October 2018 and September 2022, 40% appeared to be “fraud or scam”.

According to the FTC, more than 46,000 people lost over $1 billion trading crypto to scams and fraud between January 1, 2021 and March 31.

Since fiscal 2019, the SEC has received over 23,000 tips, complaints, and referrals regarding crypto markets.

But while the failure of FTX “has precipitated the price decline of Bitcoin and other crypto-assets”, there has been “limited impact on the broader US financial system” due to the current regulatory framework, according to the report.

The committee warned that this could change quickly if participants in traditional crypto and financial systems continue to devise ways to overlap, increasing the urgency for increased regulatory scrutiny.

Traditional banks, for example, hold stablecoins as part of their reserve assets, retail investors are increasingly using leverage to trade cryptocurrencies, and crypto has also become more widely available via some traditional financial services companies. Stablecoin is considered a less risky type of cryptocurrency because it seeks to reduce price volatility by deriving its value from a fixed traditional currency or commodity, such as the US dollar or gold.

“Such interconnections would broaden the effects of shocks that originate in the digital asset ecosystem,” the report says.

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