The
One issue is that while the Securities and Exchange Commission has taken on
Another, said the GAO, are the gaps in regulatory authority surrounding stablecoins (crypto assets meant to hold a stable value relative to a fiat currency like the U.S. dollar). It noted that stablecoin issuers often state their stablecoins are backed by reserve assets, but no uniform standards exist for reserve levels and risks or for public disclosure of reserves, which increases the risk that a stablecoin may not be able to hold its value and honor user redemption requests.
The GAO also noted that there does not seem to be an adequate framework to deal with DeFi products like decentralized exchanges or lending platforms. While current iterations are more centralized than the name might imply, thus allowing for regulatory action against them, the GAO noted that as time goes on and these products become even more dispersed, it becomes less clear how regulations will apply when DeFi products and, consequently, how regulators can address the risks from these products. These risks increase as DeFi products become more enmeshed in the cryptocurrency ecosystem, and the global economy as a whole. The GAO noted that these risks likely span multiple jurisdictions at once.
All this in mind, the GAO said Congress should pass legislation that will account for these regulatory gaps.
"Congress should consider legislation that designates a federal regulator to provide for comprehensive regulatory oversight of spot markets for nonsecurity cryptoassets, including requirements intended to protect investors from fraud and market manipulation and to promote market integrity. Congress should consider legislation providing for consistent and comprehensive oversight of stablecoin arrangements. Such legislation might include provisions identifying which institutions are eligible to issue such stablecoins; establishing minimum requirements for the composition of reserve assets and requirements for regular audits of and public disclosures of reserve assets and audit results; establishing prudential standards; and establishing redemption rights," said the report's conclusion.
In the meanwhile, the GAO also recommended that regulators jointly establish or adapt an existing formal coordination mechanism with other regulators.
"We recognize that the federal financial regulators have coordinated through various venues, and identified unaddressed risks related to crypto assets and, in some cases, responses to those risks. However, regulators' coordination efforts to date have not always addressed risks posed by cryptoassets in a timely manner. We maintain that a formal coordination mechanism focused on collectively identifying risks posed by blockchain-related products and services and formulating timely regulatory responses could improve protections for consumers and investors, mitigate illicit finance and threats to financial stability, and promote responsible innovation and U.S. competitiveness," said the report.
Senate bill would establish framework
The GAO is not the only one calling for federal regulation: Senators Cynthia Lummis (R-WY), a member of the Senate Banking Committee, and Kirsten Gillibrand (D-NY), a member of the Senate Agriculture Committee, recently reintroduced the Lummis-Gillibrand Responsible Financial Innovation Act to create a comprehensive regulatory framework for crypto assets. The bill is greatly expanded from the previous version.
The proposed legislation covers many of the areas pointed out in the GAO report. If passed, it would:
- Mandate disclosures about things such as proof of reserves, standards, and limits on lending;
- provide focused guidance to federal agencies to combat use of crypto assets
in illicit finance and to support law enforcement; - implement strong custody requirements, affiliate supervision, change of control approval, function separation and mandatory registration, alongside managing the risks and opportunities of decentralized finance;
- codify the existing Howey test, which is used to help determine whether or not something is a security;
- require all payment stablecoin issuers to become state- or federally-chartered
depository institutions under this title, with mandatory federal supervision for state issuers; - promote a whole-of-government approach to crypto assets and financial innovation in order to encourage coordination and collaboration between federal agencies; and
- provide over $1.4 billion dollars over five years in new resources to
federal agencies to implement these changes.
"I am proud to release this new, strengthened version of the bipartisan Lummis-Gillibrand Responsible Financial Innovation Act with my friend and partner Senator Lummis," said Sen. Gillibrand. "Over the past year, we worked together and with key stakeholders to improve our framework–we added strong new consumer protections and anti-money laundering provisions, delivered additional resources to regulatory agencies so they can enforce new regulations, and created clarity so that businesses can innovate responsibly. Congress has a duty to step in to protect consumers and root out bad actors, while also creating a transparent and accountable market. Our framework does that and we will make passing this bipartisan legislation a priority in this Congress."
