Government advisors and regulators have published a new report in which they’re calling for appropriate regulation of digital currencies. It refers to crypto assets as a risk to the country’s financial system. This is especially the case if the scale of cryptocurrencies or their connectedness with the traditional system increases without adhering to proper rules.
Today, the Financial Stability Oversight Council published a 124-page report on cryptocurrencies and digital securities. This comes after the US President signed the ‘Ensuring Responsible Development of Digital Assets’ executive order on March 9.
Last month, the White House came up with a ‘Comprehensive Framework’ for the development and regulation of digital assets in the US. This was followed up by an FSOC report on the financial stability and risks of digital assets.
The Chairperson of the US Securities and Exchange Commission, Gary Gensler, explained why many crypto firms have to register with the SEC. As most digital tokens are securities, the SEC will have some degree of oversight.
Government Agencies Ramp up Efforts to Regulate Digital Assets
US agencies, such as the Commodity Futures Trading Commission, Securities and Exchange Commission, and the Treasury Department, are increasing regulatory efforts for cryptocurrencies since the past year. Many crypto proponents call their method ‘regulation by enforcement’ and in their opinion, the results have been far from appealing.
Treasury Department Comments on State of Digital Assets
Treasury Secretary Janet Yellen released a statement explaining how digital assets have scaled significantly in recent years. This has allowed them to attract large amounts of interest among proponents of a decentralized currency, as well as capital from institutional and retail investors.
But unlike other investment securities, cryptocurrencies experience significant volatility. This has been highly evident in the last year. She elaborated that considering this instability, the council dubbed crypto assets as a major priority for the year when it sat down for its February meeting.
Report Points Out Key Issues
Today, the global market cap for cryptocurrencies is at $981 billion. This time around last year, it had hit a high of $2.2 trillion, indicating a loss of $1.24 trillion in one year. The report outlines four primary issues, namely high levels of instability in the digital asset ecosystem, prices determined by speculation as opposed to basic economic rules, and price values declining repeatedly by large margins.
Additionally, there is also the issue of some cryptocurrencies being associated with firms that have risky business profiles and unclear liquidity positions. Gensler also points to the risk of concentration of key services, which can ultimately lead to centralization. He explains that these days, the digital asset industry is populated by large intermediaries that are exclusive from each other. This, he says, makes the market less decentralized.