Legislative Imperative: Financial Authorities Renew Push for Crypto Risk Management

On Thursday, the Financial Stability Oversight Council (FSOC) convened to present a detailed report summarizing its concerns accumulated throughout the past year.

According to the latest findings from this intergovernmental body, urgent Congressional intervention is deemed necessary to address the apprehensions raised by the FSOC concerning the realm of cryptocurrencies. This annual report, a collaborative effort among the heads of major U.S. financial regulators forming the FSOC, meticulously examines developments across various domains such as climate, banking, cybersecurity, artificial intelligence, with cryptocurrency notably retaining a dedicated section.

The FSOC strongly advocates for Congress to enact legislation that precisely defines and manages crypto spot markets and stablecoins. Remarkably, these recommendations echo those put forth by the FSOC at the conclusion of 2022, as outlined in the report.

"The Council urges Congress to pass legislation that provides federal financial regulators with explicit rulemaking authority over the spot market for crypto-assets that are not securities. Congress should also pass legislation that would create a comprehensive prudential framework for stablecoin issuers that would also address the associated market integrity, investor and consumer protection, and payment risks."

Notably, the House of Representatives currently holds two bills addressing these concerns, both awaiting due consideration. These bills, spearheaded by Financial Services Committee Chair Patrick McHenry (R-N.C.), have garnered enough support to progress beyond the committee stage. However, the destiny of these bills in the Senate remains uncertain, despite attempts to incorporate them into the National Defense Authorization Act, which proved unsuccessful this year.

The FSOC emphasizes its preparedness to take action should Congressional measures not be promptly enacted. 

"The Council remains prepared to consider steps available to it to address risks related to stablecoins in the event comprehensive legislation is not enacted," 

states the report.

Crypto Risk Exposed: Addressing Vulnerabilities and Legislative Imperatives

The report released on Thursday sheds light on vulnerabilities within the cryptocurrency space, highlighting concerns such as price volatility, extensive industry leverage, cybersecurity threats, and other risks impacting investors and financial markets. A notable instance mentioned is the Curve Finance hack of this year, resulting in a $50 million loss. Although the protocol managed to recover 73% of the funds, the report expresses concerns about the potential collapse of loans backed by CRV due to the substantial loss of collateral.

The report also continues to underscore ongoing concerns regarding investor protections and market integrity, suggesting that certain companies may be operating outside the bounds of existing laws.

Stablecoins, a perennial concern for U.S. financial regulators, receive dedicated attention in the report. 

"If a stablecoin were to scale significantly, a run on the stablecoin could lead to fire sales of the traditional assets backing the stablecoin like bank deposits, MMFs, Treasury securities, and commercial markets, which is also small relative to the crypto-asset market and the traditional financial system," 

the report warns.

Another segment of the report delves into nonbank financial institutions, emphasizing the sector's increasing activity and the imperative need for vigilant monitoring to proactively address potential risks.

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