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U.S. Treasury council proposes new rules and increased legislation for digital assets

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(Kitco News) - Legislative actively surrounding cryptocurrencies continues to ramp up in the U.S. as the Financial Stability Oversight Council, or FSOC, has become the latest to recommend that lawmakers pass legislation to determine which “rulemaking authority” will be tasked with regulating the crypto spot market. 

In an FSOC meeting on Monday, Jonathan Rose, a senior economist at the Federal Reserve Bank of Chicago, discussed a new report released by the council that details the potential financial stability risks of digital assets and regulatory gaps. 

According to the report, “crypto-asset activities could pose risks to the stability of the U.S. financial system if their interconnections with the traditional financial system or their overall scale were to grow without being paired with appropriate regulation, including enforcement of the existing regulatory structure.” 

The report identified three gaps in the current regulatory oversight of digital assets:  (1) The spot markets for crypto-assets that are not securities are subject to limited direct federal regulation; (2) Crypto-asset businesses do not have a consistent or comprehensive regulatory framework and can engage in regulatory arbitrage; (3) A number of crypto-asset trading platforms have proposed offering retail customers direct access to markets by vertically integrating the services provided by intermediaries such as broker-dealers or futures commission merchants. This could have “financial stability and investor protection implications” due to practices like the automated liquidation of assets.

The bankruptcy of Three Arrows Capital and the collapse of Terra and its TerraUSD (UST) stablecoin were cited as events that highlight the instability in the digital asset sector and support the need for legislation and increased regulation of cryptocurrency-related businesses.

According to Anto Paroian, CEO and Executive Director at the cryptocurrency hedge fund ARK36, this latest report is a good sign as it indicates that regulators in the US have started treating cryptocurrencies as one of their top priorities. 

“It shows a broad recognition of cryptocurrencies as a noticeable part of the larger economy,” Paroian said. “No one is wondering anymore whether these assets will be available in ten years’ time, everyone is assuming that they will - and that, likely, they will become an ever more important part of the financial system.”

Paroian went on to say that the report didn’t really offer any new insights to more experienced crypto market participants, and suggested that the crypto market has done a decent job so far of flushing bad actors “out of the system during the bust cycles like the one we’re currently experiencing.”

“What the industry would benefit from are laws that could prevent bad actors from harming investors while, at the same time, allowing the crypto space to do what it does best - innovate and improve the largely outdated financial system of today.”

Global banks only have a 0.01% exposure to crypto, according to the BIS

In a prepared statement for the council meeting, Treasury Secretary Janet Yellen said: “These reports provide a strong foundation for policymakers as we work to mitigate the risks of digital assets while realizing the potential benefits. They also provide a valuable addition to the public’s understanding of digital assets.”

Recommendations included in the report, which are designed to “ensure appropriate regulation of crypto-asset activities,” include “the consideration of regulatory principles, continued enforcement of the existing regulatory structure, steps to address each regulatory gap, and bolstering member agencies’ capacities related to crypto-asset data and expertise.”

Based on the recommendations of the council, it appears as though the Commodity Futures Trading Commission (CFTC) could be one of the regulators given authority over the crypto spot market.

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