The Treasury Department warned Monday that unregulated cryptocurrencies could pose a risk to the US financial system.
The warning was part of the first major public report released by the Treasury’s Financial Stability Oversight Council on digital assets. The council identified digital or “crypto” assets, such as stablecoins, as well as lending and borrowing on the industry’s trading platforms as a “major emerging vulnerability”.
“The report concludes that crypto-asset activities can pose risks to the stability of the US financial system and emphasizes the importance of appropriate regulation, including enforcement of existing laws,” said Treasury Secretary Janet Yellen. “It is vital that government stakeholders work together to make progress on these recommendations.”
In February, the council designated digital assets as a priority area for the first time.
US Secretary of the Treasury Janet Yellen speaks at the Atlantic Festival on September 22, 2022 in Washington, DC.
Kevin Dietsch | Getty Images
According to the report, the global market cap of crypto assets peaked last November at about $3 trillion, representing about 1% of global financial assets. While the impact in the larger global financial system is relatively small, digital finance is rapidly gaining popularity and is being manipulated by criminals for illegal profit, according to the report.
Earlier this year, the Ministry of Finance issued a series of sanctions against Russian oligarchs, certain Russian banks and other organizations for using crypto assets to evade sanctions. In September, the agency blocked all property owned or controlled by US individuals for 22 individuals and two entities that helped digitally fund Russia’s invasion of Ukraine.
Stablecoins, a type of cryptocurrency popular in the foreign exchange market, are also overwhelmingly used in speculative trading of crypto assets, Rohit Chopra, director of the Consumer Financial Protection Bureau, said at a Monday FSOC meeting.. Created for price stability, the stablecoin’s price is pegged to flat currencies, commodities or other crypto assets.
The group recommended legislation that would allow financial regulators to oversee the industry more vigorously, as well as expanding banking exams to require federal and state agencies to look at services provided by crypto asset service companies.
Founded after the 2008-2009 financial crisis, the FSOC identifies emerging threats to the country’s financial security and orchestrates a coordinated response from US financial regulators. Under the Dodd-Frank Act, the FSOC is empowered to oversee and regulate non-bank financial undertakings, financial market utilities, and payment, clearing or settlement activities to address potential vulnerabilities to financial stability.
The report states that to date, the FSOC has not used this authority to regulate the cryptocurrency market.
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