Financial Stability Oversight Council Urges Congress to Pass Crypto Legislation to Address Concerns

A new report released by the Financial Stability Oversight Council (FSOC), a financial stability watchdog composed of heads of major U.S. financial regulators, highlights the need for Congress to pass legislation to address concerns around cryptocurrencies. The report, which covers various issues including climate, banking, cybersecurity, and artificial intelligence, emphasizes the council’s recommendation for Congress to define and regulate crypto spot markets, as well as stablecoins.

These recommendations are not new, as FSOC had already made the same suggestions at the end of 2022. The council urges Congress to provide federal financial regulators with explicit rulemaking authority over crypto-assets that are not securities. Additionally, FSOC calls for the creation of a comprehensive prudential framework for stablecoin issuers, addressing market integrity, investor and consumer protection, and payment risks.

In the House of Representatives, two bills related to these issues are pending, having been moved out of committee with the support of Financial Services Committee Chair Patrick McHenry (R-N.C.). It remains uncertain whether these bills will advance to a Senate vote, as earlier attempts to include crypto provisions in the National Defense Authorization Act of 2023 did not succeed.

The FSOC report raises concerns about vulnerabilities in the crypto industry, including price volatility, excessive leverage, and cybersecurity risks, which pose potential threats to investors and financial markets. The report cites the recent hack of Curve Finance, which resulted in a $50 million loss. Although a significant portion of the funds was recovered, the report highlights the risk of loan-backed collateral falling apart due to a sharp decline in the collateral’s value.

The report also expresses ongoing worries about investor protections and market integrity, suggesting that some companies may be operating outside existing laws. Stablecoins, a long-standing concern for U.S. finance regulators, are particularly emphasized in the report. It warns that if a stablecoin were to scale significantly, a run on the stablecoin could trigger fire sales of the traditional assets backing it, such as bank deposits, money market funds, Treasury securities, and commercial markets.

Another key aspect discussed in the report is the increased activity of nonbank financial institutions, which require careful monitoring for potential risks, according to the FSOC.

While the report presents these issues and recommendations, it also acknowledges that if comprehensive legislation is not enacted, regulators may need to take action to mitigate risks associated with stablecoins. The FSOC remains prepared to consider steps available to it in such a scenario.

Overall, the FSOC report underscores the importance of legislation to address concerns surrounding cryptocurrency markets and stablecoins. It calls upon Congress to empower federal financial regulators and create a comprehensive framework to ensure market integrity, investor protection, and stability.