U.S. Treasury Secretary Janet Yellen speaks at the Atlantic Festival on September 22, 2022 in Washington, DC.
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The Treasury Department warned Monday that unregulated cryptocurrencies could pose a risk to the U.S. financial system.
The warning was a part of the first major public report released by the Treasury’s Financial Stability Oversight Council on digital assets. The council identified digital or “crypto” assets such as stablecoins as well as lending and borrowing on the industry’s trading platforms as an “important emerging vulnerability.”
“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,” Treasury Secretary Janet Yellen said. “It is vital that government stakeholders collectively work to make progress on these recommendations.”
The council first designated digital assets a priority area in February.
Global crypto-asset market capitalization reached a peak of roughly $3 trillion last November, comprising approximately 1% of global financial assets, according to the report. Though the impact is relatively small in the larger global financial system, digital financing is quickly gaining in popularity and is being manipulated by criminals for illegal gain, according to the report.
Earlier this year, the Treasury Department issued a series of sanctions against Russian oligarchs, certain Russian banks and other organizations for using crypto assets to evade sanctions. In September, the agency blocked all property in possession or control of U.S. persons for 22 individuals and two entities that helped digitally finance Russia’s invasion of Ukraine.
Stablecoins, a type of cryptocurrency popular on the foreign exchange market, are also overwhelmingly used in speculative crypto-asset trading, a member of the council said during a Monday FSOC meeting. Created for price stability, the price of the stablecoin is linked to flat currencies, commodities or other crypto assets.
The group recommended legislation that empowers financial regulators to more vigorously oversee the industry as well as expanding bank exams to require federal and state agencies to look at services provided by crypto asset service companies.
Formed after the 2008-2009 financial crisis, FSOC identifies emerging threats to the country’s financial security and organizes a coordinated response across U.S. financial regulators. Under the Dodd-Frank Act, the FSOC is authorized to supervise and regulate nonbank financial companies, financial market utilities and payment, clearing or settlement activities to address possible vulnerabilities to financial stability.
The report states that, to date, the FSOC has not used this authority to regulate the cryptocurrency market.