The Treasury Department warned Monday that unregulated cryptocurrencies could pose a risk to the US financial system.
The warning was part of the first major public report released by the Treasury Department’s Financial Stability Oversight Council on digital assets. The council identified digital or “crypto” assets, such as stablecoins, and lending and borrowing on the industry’s trading platforms as “a key emerging vulnerability.”
“The report concludes that crypto-asset activities could pose risks to the stability of the US financial system and emphasizes the importance of proper regulation, including enforcement of existing laws,” Treasury Secretary Janet Yellen said. “It is critical that government stakeholders work together to make progress on these recommendations.”
The council first made digital assets a priority area in February.
US Treasury Secretary Janet Yellen speaks at the Atlantic Festival September 22, 2022 in Washington, DC.
Kevin Dietsch | Getty Images
According to the report, the global crypto asset market cap peaked at around $3 trillion last November, accounting for about 1% of global financial assets. Although the impact in the larger global financial system is relatively small, digital finance is rapidly gaining popularity and being manipulated by criminals for illicit gains, according to the report.
Earlier this year, the Ministry of Finance imposed a series of sanctions on Russian oligarchs, certain Russian banks, and other organizations for using crypto assets to circumvent sanctions. In September, the agency blocked all property owned or controlled by US citizens for 22 individuals and two entities that helped digitally fund Russia’s invasion of Ukraine.
Stablecoins, a type of cryptocurrency popular in the forex market, are also predominantly used in speculative trading of crypto assets, Rohit Chopra, director of the Consumer Financial Protection Bureau, said during an FSOC meeting on Monday. The price of the stablecoin was created for reasons of price stability and is pegged to flat currencies, commodities or other crypto assets.
The group recommended legislation that would allow financial regulators to oversee the industry more closely, as well as expanding bank audits to require federal and state agencies to audit the services provided by crypto-asset service companies.
Formed after the 2008-2009 financial crisis, the FSOC identifies new threats to the country’s financial security and orchestrates a coordinated response from all US financial regulators. Under the Dodd-Frank Act, FSOC has the power to oversee and regulate non-bank financial firms, financial market providers and payment, clearing or settlement activities to address potential financial stability vulnerabilities.
The report notes that the FSOC has not previously used this power to regulate the cryptocurrency market.