Are new U.S. Cryptocurrency laws coming?
The Financial Stability Oversight Council (FSOC) published its long-awaited report on October 8, 2022 on the financial stability risks associated with digital currencies.
The FSOC prepared the report in relation to the presidential executive order, the Comprehensive Framework for Responsible Development of Digital Assets, issued on September 16, 2022. With the executive order the Biden administration ordered FSOC to publish a report which evaluates digital assets’ financial-stability risks, identifies areas where regulation is missing or is ineffective, and makes additional recommendations to ensure financial stability.
What is FSOC?
The FSOC stands for Financial Stability Oversight Council and was established by the Dodd-Frank Act following the 2008 financial crisis. The purposes of the FSOC is to identify systemic risks to the US financial system, to promote market stability and ensure that “too big too fail” players in the financial industry do not get wrong incentives and count on a government bail out in times of financial distress.
Why the FSOC report matters?
Recommendations in the FSOC report can serve as the basis for legislative action and new U.S. cryptocurrency laws and regulations.
Currently, it is not entirely clear which token is security and which commodity. That makes crypto businesses unsure as to how should they be regulated. Does a crypto exchange need only a Money Transmitter License from a state regulator or a securities broker license from FINRA and the SEC? The FSOC report could prompt Congress to act and promulgate new U.S. Cryptocurrency laws to make it clear which regulator has authority over which activity.
FSOC report on crypto
- Crypto is not a huge risk to the financial system. Crypto assets could pose significant risk to the traditional financial system, but at present they are not strongly interconnected, limiting such risks.
- Many crypto-asset activities lack basic risk controls. Many crypto businesses have no way to protect from panicked runs by investors to withdraw their crypto, have excessive leverage and poor capital and liquidity.
- Lack of compliance. The FSOC report found that certain crypto firms issued or traded crypto tokens that are considered securities without proper registration or licenses. In addition, crypto firms have falsely implied their products are FDIC insured or otherwise protected by the U.S. government.
- State money transmitter regulations do not address financial stability. Currently, most crypto firms hold money transmitter licenses from the various states they operate in. Those licenses require crypto firms to focus on anti-money laundering policies and customer protection but do not address financial stability issues such as excessive leverage.
- Lack of spot market regulation. For cryptocurrencies that are not securities, such as Bitcoin or Ethereum, spot markets are not subject to direct federal regulation. That makes them vulnerable to market manipulation, such as pump and dump schemes and insider trading.
FSOC recommendations
The FSOC recommends a set of regulatory principals, continued enforcement, coordination between regulators and addressing regulatory gaps.
To address the regulatory gaps the Financial Stability Oversight Council recommends that US Congress pass new U.S. cryptocurrency legislation to:
- Provide for explicit rulemaking authority for federal financial regulators to oversee the spot markets for crypto tokens that are not considered securities.
- Provide framework for stablecoin issuers that ensure market integrity, investor and consumer protection, and financial stability risks of stablecoins.
- Give authority to regulators to supervise the activities of all of the affiliates and subsidiaries of crypto businesses, if they do not have such authority.
It remains to be seen if and when Congress takes legislative action as recommended by the FSOC. It is very likely that Congress takes on the issue next year, given the growth in cryptocurrency, NFTs and other crypto assets.
If you are starting a crypto business and need advice on regulation or licensing requirements, contact us or book an appointment with our crypto lawyers.
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