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GAO wants US Congress to address blockchain regulatory gaps

The U.S. government’s top auditor has called on the Congress and federal regulators to address gaps in regulation for stablecoins and digital assets that aren’t securities.

In a recent report, the U.S. Government Accountability Office (GAO) offered its perspective on blockchain use in finance and the legislative and regulatory actions needed to ensure comprehensive sector oversight.

Blockchain promises faster and cheaper financial transactions with no middlemen, says the report commissioned by Rep. Maxine Waters (D-Cal.) and Rep. Stephen Lynch (D-Mass.) for the Financial Services Committee.

However, GAO says there exist gaps in federal regulation that scammers can leverage to defraud investors.

“No federal financial regulator has comprehensive authority to regulate the spot market for crypto assets that are not securities,” the report notes. In contrast, digital asset securities are regulated by several authorities, led by the Securities and Exchange Commission (SEC).

GAO, the supreme auditor of the federal government, also pointed to gaps in the regulation of stablecoins, stating that reserve assets supposedly back these tokens.

However, “no uniform standards exist for reserve levels and risks or for public disclosure of reserves. This increases the risk that a stablecoin may not be able to hold its value and honor user redemption requests.”

This vulnerability became most apparent last year when Terra’s UST stablecoin crashed, taking down a $60 billion ecosystem and catalyzing the collapse of several major industry players. Other stablecoins have also shown their vulnerabilities: Binance admitted that its stablecoin hasn’t always been fully backed, and Tether’s struggles are well documented.

GAO recommends that Congress establish a “formal coordination mechanism for addressing blockchain-related risks, which could establish processes or time frames for responding to risks.” It says this will help federal watchdogs collectively identify risks and develop timely responses.

The agency also issued recommendations for each of the seven federal financial regulators, including the SEC, the CFTC, the FDIC, and the Federal Reserve System. It urged them to conduct regular meetings discussing digital asset oversight and establish a formal coordination mechanism to respond to industry risks.

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