The Financial Stability Oversight Council (FSOC) released its own highly anticipated Report in response to US President Joe Biden’s executive order on Crypto earlier this week, calling on Congress to draw the line between a safe and a non-safety. security, at least as far as crypto is concerned.

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The narrator

The Financial Stability Oversight Council (FSOC) has finally released a long-awaited report on crypto regulation. Essentially, the FSOC said it believes federal agencies already have much of the authority they need to oversee large parts of the crypto industry. The one area he really asked Congress to get involved in is defining exactly where the boundaries of securities regulation should be. In other words, a lot of it wasn’t really a surprise.

why is it important

In the United States, where does the dividing line between a crypto security and a crypto commodity lie: where exactly does the authority of the Securities and Exchange Commission end and where does the authority of the Commodity Futures Trading Commission begin? Congress hasn’t really tried to answer that question. Of course, there are bills that somehow seek to address this issue, such as the Senate Agriculture Committee’s DCCPA. But a closer look at the text shows that it doesn’t actually provide that definition. This has left much of crypto in a strange kind of limbo.

break it down

The FSOC released a 124-page document on Monday. Here’s CoinDesk’s Jesse Hamilton on the highlights.

As a reminder, the board is made up of Treasury Secretary Janet Yellen, Federal Reserve Board Chairman Jerome Powell, Acting Comptroller of the Currency Michael Hsu, Consumer Financial Protection Bureau Director Rohit Chopra, Chairman of the Securities and Exchange Commission Gary Gensler, Commodity Futures Trading Commission Chairman Rostin Behnam, Federal Deposit Insurance Corporation Acting Chairman Martin Gruenberg, National Credit Union Administration Chairman Todd Harper and a handful of others.

The report itself largely detailed what currently exists in crypto, detailing existing rules and regulations, some of the recent events and precedents we have seen, and a summary of how regulators see crypto posing possible risks to the United States and perhaps more widely. financial system.

“Certain characteristics of crypto-asset businesses have greatly amplified instability within the crypto-asset ecosystem. Many crypto-asset businesses lack basic risk controls to protect against run risk or to help ensure that leverage is not excessive Crypto-asset prices appear to be driven primarily by speculation rather than based on current fundamental economic use cases, and prices have repeatedly registered dips significant and broad declines,” the report said.

The report also aimed to find out how many companies that offer services in the crypto ecosystem present themselves as regulated. They’re not lying, but the report fears that usually means they’re being watched as money transmitters.

The FSOC is concerned that money transmission frameworks do not focus heavily on anti-money laundering controls, customer protection, and fail to address financial stability issues at all.

In particular, the report indicates that there are issues with the cryptocurrency spot market. Namely, there is no federal cash market regulator or framework. There is also no real international framework, which could allow different entities to carry out regulatory arbitrage.

Another concern seems to target FTX (and I guess CME now) noting that some platforms want to offer retail clients direct access to their markets, again raising stability questions.

In short: financial stability (obviously) is the primary concern when it comes to how crypto interacts with the rest of the world, whether through stablecoin payments, banking, real assets tokens, investment products, or even just this general idea that crypto and crypto tools can be used to facilitate, replace, or even just enhance some of the more traditional financial activities that take place out there.

And then there are the hacks and crashes. A fairly large section of the report focuses on the fact that much of crypto is built around speculative trading, but is vulnerable to frequent hacks (at the time of this writing, the most recent hack was around 3 p.m.) and other problems.

“Fundamental economic use cases do not currently anchor the prices of many crypto assets. Rather than reflecting cash flow analysis, crypto asset prices may reflect the likelihood that economic use cases may develop in the future, weighed against the likelihood, as expressed by some industry commentators, that no meaningful economic use of blockchain technologies may develop, the report says.

The prevalence of (suspected) fraudsters also naturally plays a leading role.

Namely: the important part is the recommendations here. The first two are simple -= regulators should treat crypto risk like they treat other risks, continue to enforce rules, etc.

The third, fifth, and sixth recommendations call on Congress to get busy.

“The Council recommends that Congress enact legislation providing explicit regulatory authority for federal financial regulators over the cash market in crypto-assets that are not securities,” the report states in the third recommendation. “The Council recommends that this regulatory authority does not interfere with or weaken the current jurisdictional powers of market regulators.”

Recommendation five called for stablecoin legislation, six called for letting regulators coordinate or even override the regulation of subsidiaries and subsidiaries (if those subsidiaries operate under, say, a state regulator rather than a federal one),

Other recommendations include closer coordination among different regulators, whether state to state or with different types of regulatory entities, and that federal regulators continually develop and reassess their knowledge of cryptography when overseeing and authorizing different entities.

There is also a call for “a coordinated, whole-of-government approach to data and analysis, monitoring, oversight and regulation of crypto-asset activities. The Council recommends that member agencies consider using available data collection powers to facilitate financial risk assessments of crypto-assets, as part of data sharing and coordination efforts among members.

The other thing that’s really interesting is that we sort of previewed the report on Monday with the New York Fed, which released a research paper earlier today detailing some of the concerns that exist about stablecoins. In particular, he said that even supposedly safe stablecoins like USDC could pose a risk to the broader financial sector if it becomes a safe haven for people fleeing less safe stablecoins backed by sketchy assets.

Changing of the guard

N / A

• Italy Failed to Verified All 73 Crypto Firms It Approved This Year: All 73 Italian crypto firms approved this year. What the country’s financial supervisor has not done is check these companies or check whether they actually have offices in the country. Sandali Handagama returns to this frankly questionable state of affairs.

• (Unleashed Podcast) I don’t normally share things I’m on, but I had a fun chat with Laura Shin on her “Unchained” podcast about the CFTC vs. Ooki DAO combination and the different quirks it has.
• (the wall street journal) I’m not very good at economics, but it’s worth pointing out: Freight transport entities are anticipating reduced demand.

To be fair, Google Stadia has faced terrible difficulties over the past 3 years, having to deal with:
– a global pandemic forcing people to turn to online entertainment.
– shortage of graphics cards and consoles, creating a strong demand for alternatives.

If only they hit the market at a better time— Aadit Doshi (@AaditDoshi) September 29, 2022

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