US Treasury encourages new laws to address crypto regulatory loopholes

Oct 3 (Reuters) – The Financial Stability Oversight Council (FSOC), a U.S. regulatory commission made up of top financial regulators, recommended on Monday that Congress pass legislation to address the risks digital assets pose to the financial system , including bills to strengthen oversight of spot and stablecoin crypto markets.

In a report following US President Joe Biden’s executive order this year “Ensuring the Responsible Development of Digital Assets,” the committee identified three gaps in cryptocurrency regulation: limited oversight of the spot market for non-securities tokens; opportunities for regulatory arbitrage or taking advantage of favorable rules; and whether crypto companies should be allowed to integrate multiple services traditionally provided by intermediaries such as broker-dealers and clearing houses.

The report was released after an FSOC meeting on Monday.

In a statement, Treasury Secretary Janet Yellen said the report “provides a strong foundation for policymakers as we work to mitigate the financial stability risks of digital assets while realizing the potential benefits of innovation.

Although FSOC has previously urged Congress to regulate stablecoin issuers like banks, Monday’s report included several new recommendations for lawmakers, including that they create a federal framework for stablecoin issuers to address market integrity and protections of the consumers.

The FSOC report follows a list of others released last month related to the White House executive order. In September, the Biden administration released a series of reports recommending that US government agencies redouble enforcement of the digital assets sector and identify loopholes in regulation.

It remains unclear when Congress might pass cryptocurrency-related legislation, although several bills have been introduced to address stablecoin and digital commodity regulations.

The FSOC report also suggested that Congress pass legislation to give federal financial regulators rulemaking authority over the spot market for non-securities cryptocurrencies in order to address conflicts of interest and abusive trading practices.

Lawmakers should also consider legislation that gives regulators the power to oversee the activities of crypto subsidiaries and affiliates, which the FSOC says could face regulatory arbitrage, the report said.

Reporting by Hannah Lang in Washington. Edited by Josie Kao

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