Janet Yellen-led group: Digital assets could threaten financial stability if not regulated

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A federal group charged with monitoring risks that threaten the United States financial system has called on U.S. lawmakers to speed up the formulation of regulations for the digital assets industry. The group, led by Treasury Secretary Janet Yellen, warned that the industry could pose a systemic risk to America’s financial stability if not regulated.

The group, known as the Financial Stability Oversight Council (FSOC), falls under the Treasury Department. It was created under the Barack Obama administration in the aftermath of the 2008 financial crisis and is charged with identifying and monitoring risks to the U.S. financial system.

In its “Report on Digital Asset Financial Stability Risks and Regulation,” the group highlighted the risks posed by a volatile and under-regulated digital asset industry and called on regulators to appoint one “rulemaking authority” to police the industry.

“The scale of crypto-asset activities has increased significantly in recent years. Although interconnections with the traditional financial system are currently relatively limited, they could potentially increase rapidly,” the report stated.

FSOC wants the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and other financial agencies to prioritize digital asset enforcement. It also wants Congress to beef up the agencies’ digital asset capabilities and equip them to handle the industry better.

This comes at a time when the CFTC and SEC have stepped up efforts to establish themselves as the industry’s top watchdog. Both have also strengthened their digital asset teams, with the SEC doubling the headcount and renaming its Crypto Assets and Cyber Unit. CFTC renamed LabCFTC to the Office of Technology Innovation to better police the sector.

Commenting on the report, Federal Reserve Bank of Chicago’s Jonathan Rose stated that “while some firms in the crypto asset ecosystem have attempted to avoid regulation, other firms have engaged with the existing regulatory system by obtaining trust charters or special state-level crypto asset-specific charters or licenses. The report recommends the passage of legislation in providing a rulemaking authority for federal financial regulators over this [spot] market.”

While it didn’t back any agency to oversee the industry, the report seemed to lean towards the CFTC. It noted that many digital assets don’t qualify as securities–which would put them under the purview of the SEC–and virtual asset providers (VASPs) have taken advantage of it.

It recommended “the passage of legislation providing for rulemaking authority for federal financial regulators over the spot market for crypto-assets that are not securities.”

Watch: The BSV Global Blockchain Convention panel, The Future of Financial Services on Blockchain: More Efficiency & Inclusion