Market participants welcomed the Financial Stability Oversight Council’s report which identified gaps in the regulation of crypto-asset activities in the United States.

The Report on Digital Asset Financial Stability Risks and Regulation reviews financial stability risks and regulatory gaps posed by digital assets and provides recommendations to address such risks.

Janet Yellen, Secretary of the Treasury, said in a statement: “The report concludes that crypto-asset activities could pose risks to the stability of the U.S. financial system and emphasizes the importance of appropriate regulation, including enforcement of existing laws. It is vital that government stakeholders collectively work to make progress on these recommendations.”

The full report.

A fact sheet summarizing the report’s key findings and recommendations.

Faryar Shirzad, chief policy officer at listed crypto exchange Coinbase, said:

2/ In particular, the report recommends giving the CFTC spot market oversight authority. We agree. This is in line with the bill from @SenStabenow and @JohnBoozman, and proposals from other members, both Ds and Rs, and is the obvious critical next step.

— Faryar Shirzad (@faryarshirzad) October 4, 2022

4/ The report acknowledges that regulation needs to be coordinated in our fragmented system. We agree – this is welcome and critical. @coinbase has long called for a comprehensive federal regulatory framework that provides clarity, enables innovation & protects customers

— Faryar Shirzad (@faryarshirzad) October 4, 2022

6/ It also stands in contrast with the more forward looking advances in crypto and digital asset regulation being proposed in important markets around the world.

— Faryar Shirzad (@faryarshirzad) October 4, 2022

Michael J. Hsu, acting Comptroller of the Currency said in a statement:

“I support the Report on Digital Asset Financial Stability Risks and Regulation and would like to draw special attention to the recommendations focused on minimizing regulatory arbitrage.

We know from the 2008 financial crisis what happens when regulatory agencies fail to coordinate effectively on risks that cut across jurisdictional lines:  an unlevel playing field emerges and financial stability risks grow in the shadows.

The Council was established by Congress to address that problem. However, for the Council to work as designed, each member must consider financial stability from a systemwide perspective first and foremost.  This is especially important in emergent areas like crypto.

Acting Comptroller of the Currency Issues Statement on FSOC’s Report on Digital Asset Financial Stability Risks and Regulation https://t.co/myCMD500RF

— OCC (@USOCC) October 3, 2022

With this in mind, I believe it is critical for the Council and Congress to prioritize Recommendation 4 regarding interagency coordination, Recommendation 5 regarding a federal prudential framework for stablecoin issuers, and Recommendation 6 regarding regulatory visibility and authorities over all of the activities of crypto-asset entities.

Properly implementing these recommendations will help mitigate regulatory arbitrage and, thus, risks to financial stability.”

Perriane Boring, founder of the Chamber of Digital Commerce, which promotes the acceptance and use of digital assets and blockchain-based technologies, said in a statement:

Our Founder and CEO @PerianneDC responded to the report "Digital Asset Financial Stability Risks and Regulation 2022", issued by the Financial Stability Oversight Council today: https://t.co/VIkaBCoBZ5
⬇️ ⬇️ ⬇️ pic.twitter.com/mNBUYZmBNj

— Chamber of Digital Commerce (@DigitalChamber) October 3, 2022

Basel consultation

Outside the US, the Basel Committee on Banking Supervision is consulting on the prudential treatment of cryptoasset exposures. A group of financial trade associations sent a joint response which said recent heightened volatility in cryptoasset markets has underscored the risks that emerge when a significant financial market develops outside a prudential risk management framework where excess leverage, inadequate liquidity, and lack of capital can materialise, regardless of the benefits of technology.

GFMA and 7 other trade associations have submitted a response to the Basel consultation on the prudential treatment of #crypto
Read the full response here: https://t.co/9sTr4nZ9pJ pic.twitter.com/Ax4fuIML1n

— GFMA (@GFMAnews) October 4, 2022

“Allowing appropriately risk-managed cryptoasset banking and other financial activities to take place within the regulatory perimeter should be a central goal of the final Basel Committee standards,” added the letter. “A prudential framework that permits banks to support the growth of cryptoassets benefits supervisors by providing better insight into the evolution and growth of these activities (e.g., by requiring the reporting of cryptoasset exposures). At the same time, customers and investors will benefit from more transparent trusted alternatives and the protections of fully regulated institutions providing services.”

UK review 

In the UK fintech trade body Innovate Finance and law firm Shearman & Sterling sent a paper in response to the House of Commons Treasury Committee inquiry into the cryptoasset industry.

We have been working with @ShearmanFinTech and submitted a comprehensive evidence paper to the House of Commons Treasury Committee inquiry into crypto-assets ??

Read the full paper via the link below ⬇️
? https://t.co/7Jma8tUgyp#InnovateFinanceMember #FinTech #FinTechNews pic.twitter.com/8PHTYz9ogN

— Innovate Finance (@InnFin) October 4, 2022

Their analysis showed that the UK has been the leading destination after the USA for investment in distributed ledger technology (DLT) and crypto-asset based businesses but this year, Singapore has overtaken and pushed the UK into third position.

The paper detailed short, medium and long term measures for government and regulators, for the UK to region its position including establishing a joined-up strategy across Government, regulators and the legal system; ensuring a continued review of UK law and regulation and an improvement in the responsiveness and service levels of regulators in processing applications for new businesses.