The annual report for 2019 from the US Financial Stability Oversight Council (FSOC) has called for tighter regulations on stablecoins and digital assets.
To stay ahead of developments in the crypto markets, the FSOC formed a digital asset and distributed ledger technology working group in 2017. The council periodically reviews new developments in blockchain technology and assesses their risk to the US economy.
Established in the aftermath of the 2008 financial crisis, the FSOC identifies and makes recommendations on financial risks which could undermine the US banking sector.
As part of its latest annual report, the council has now identified digital assets and stablecoins as major areas for concern, urging closer scrutiny of existing laws and a review of new products in the blockchain space.
Calling for closer regulation of digital assets, the report says:
“The council recommends that federal and state regulators continue to examine risks to the financial system posed by new and emerging uses of digital assets and distributed ledger technologies.”
The report claims that while the market capitalisation of digital assets has grown significantly over the last few years, cryptocurrencies are yet to be used as a viable payment method or as a true store of value.
Citing security risks to US financial stability, monetary integrity, and the risk of illicit financing, the report urges financial regulators to review the current digital asset landscape and draft new laws if necessary.
The council also placed a strong focus on stablecoins, which it claimed may exert a wider effect on the entire economy in the event of their failure. The report states:
“If a stablecoin became widely adopted as a means of payment or store of value, disruptions to the stablecoin system could affect the wider economy.”
Regulators worldwide have expressed concerns that projects such as Facebook’s Libra coin, which is a stablecoin with potential access to billions of users, could undermine the integrity of national currencies and are a danger to monetary sovereignty.
Digital asset trading
Singling out cryptocurrencies, the expert council also voiced concern over the volatility of digital asset markets, citing the huge rise and subsequent crash of the markets during early 2018.
According to the report, the scarcity of data on blockchain markets and its unreliability make trading digital assets potentially risky.
The report also criticises blockchain technology itself, claiming that the ultimate success of the technology and its application in the financial sector is still uncertain.
To close its analysis of digital assets, the council had this to say:
“Digital asset networks may also be subject to operational risks, including disruptions to the technologies that underlie the platform and cybersecurity. These events could prove disruptive to users and, in an extreme case, undermine confidence in the system as a whole.”
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.