A Treasury Department council has recommended additional legislation and regulation to mitigate potential risks to the financial system posed by digital assets.

In its Report on Digital Asset Financial Stability Risks and Regulation, the Financial Stability Oversight Council (FSOC) identified three gaps in crypto-asset regulation:

- limited direct federal oversight of the spot market (a market in which financial instruments, such as commodities, currencies, and securities are traded for immediate delivery) for crypto-assets that are not securities;
- opportunities for regulatory arbitrage; and
- whether vertically integrated market structures can or should be accommodated under existing laws and regulations.

The FSOC, created by the Dodd-Frank Act, includes the leaders of all U.S. banking and financial agencies and is chaired by Treasury Secretary Janet L. Yellen. This report is in response to President Biden’s March 9 Executive Order on Ensuring Responsible Development of Digital Assets, Section 6 of which states that the “United States must assess and take steps to address risks that digital assets pose to financial stability and financial market integrity.”

To address the regulatory gaps, the Council recommended:

• the passage of legislation providing for rulemaking authority for federal financial regulators over the spot market for crypto-assets that are not securities;
• steps to address regulatory arbitrage including coordination, legislation regarding risks posed by stablecoins, legislation relating to regulators’ authorities to have visibility into,  and otherwise supervise, the activities of all of the affiliates and subsidiaries of cryptoasset entities, and appropriate service provider regulation; and
• study of potential vertical integration by crypto-asset firms.

“This 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,” said Secretary Yellen in a press release. “The report concludes that crypto-asset activities could pose risks to the stability of the U.S. financial system and emphasizes the importance of appropriate regulation, including enforcement of existing laws. It is vital that government stakeholders collectively work to make progress on these recommendations.”