Dive Brief:

• Congress should pass legislation to address gaps in oversight of the crypto sector, the Financial Stability Oversight Council (FSOC) recommended in a report released on Monday.
• The federal panel, which is made up of the nation’s top financial regulators, said more oversight is needed of stablecoins and crypto spot markets for tokens that are not securities. The panel also wants regulators to work in tandem to issue rules that would help prevent regulatory arbitrage in the crypto sector, which they said lacks “a consistent or comprehensive regulatory framework.”
• The FSOC report responds to a March executive order from President Joe Biden for a “whole-of-government” effort to study the risks and benefits related to digital assets and their underlying technology.

Dive Insight:

Treasury Secretary Janet Yellen, who chairs the FSOC, said the report provides a “strong foundation” for policymakers as they “work to mitigate the risks of digital assets while realizing the potential benefits.”

“The report concludes that crypto-asset activities could pose risks to the stability of the U.S. financial system and emphasizes the importance of appropriate regulation, including enforcement of existing laws,” she said in a statement Monday. “It is vital that government stakeholders collectively work to make progress on these recommendations.”

The FSOC, which is led by the Treasury Department, called for regulators to study the potential vertical integration by crypto-asset firms. The council’s members also include representatives from the Federal Reserve Board, the Comptroller of the Currency, the Securities and Exchange Commission and the Consumer Financial Protection Bureau, among other agencies.

“Financial stability and investor protection implications may arise from retail investors’ exposure to certain practices commonly proposed by vertically integrated trading platforms,” the FSOC said.

The wide ranging report comes amid a tumultuous year for the digital asset industry. In recent months, the sector has experienced a period of market cooling, highlighted by several bankruptcies, consolidations, layoffs and steep drops in the price of Bitcoin and other cryptocurrencies.

Monday’s report recommended agencies, including the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission, prioritize enforcement of the crypto sector, echoing a similar call made by the White House last month.  

In a series of reports, the Biden Administration called for financial regulatory agencies to step up enforcement actions against digital asset firms that harm consumers.

The council also called on bank regulators to review bank-crypto partnerships and “evaluate whether their existing authorities are sufficient.”

The FSOC also recommended that agency council members bolster their abilities to monitor and collect data related to crypto-asset activities.