Financial Security Oversight Committee (FSOC) Calls On Congress To Regulate Spot Crypto Trading

On Dec 19, 2022

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After witnessing repeated mishaps in the cryptocurrency market, the US financial regulators have once again started to urge congress to regulate spot crypto trading. And that demand is much louder this time.

Legislators have always seen crypto as a wild card. Even though they understand the need for people to have financial independence, government authorities have always been wary of what the lack of regulations can bring. And the back-to-back cryptocurrency tragedies – first LUNA and then FTX – has these authorities screaming that from this point forth, the need for regulations is more important than ever.

FSOC Issues the Financial Report Extolling the Issues of Crypto Without Regulations

The Financial Stability Oversight Council (FSOC) is a joint body made up of the heads of the Security Exchange Commission, the Federal Deposit Insurance Corporation, and the Federal Reserve Board. It issued an annual report this week and didn’t hold back about the issues borne out of the lack of regulations in cryptocurrency trading.

“The decline in traditional asset prices was magnified in crypto asset markets. Widely-traded crypto assets experienced sharp price drops, with Bitcoin losing more than half of its value,” – the report further put evidence about the Council’s Report of Digital Asset Financial Stability showed that “crypto-asset activities could pose risks to the stability of the US financial system if its interconnection with the traditional financial system and the scale grows without appropriate regulation.”

In its October report, the Financial Stability Oversight Council showed the regulatory gaps that exist in crypt-asset trading activities. The latest report creates a passage for congress to establish a rule-making authority for the financial regulators over the spot market assets that are not securities.

Other recommendations in the report are:

Creation of steps to address regulatory arbitrage, so the exchanges and consumers can’t take advantage of differences in laws from different jurisdictions to commit fraudulent acts.
Exploring if the vertical market structures can come under existing laws so that there is a sense of uniformity in cryptocurrency trading and the removal of any ambiguity that arises with the emergence of new crypto assets.
Enhancing the powers of FSOC in terms of monitoring, supervision, data storage, and analysis of cryptocurrency trading.

The Rise of Fraud Complaints in the Crypto Space

“Over 40% of complaints it received between October 18 and September 2022 were related to fraud issues,” – the report states. And between January 2021 and March 2022 alone, over 46,000 traders lost more than $1 billion worth of crypto assets due to the rampant fraud in the market.

These losses due to fraud are separate from the money people have lost due to the 2022 bear market. The fall of LUNA in May erased upwards of $70 billion from the market. And the recent FTX crash has dropped the total cryptocurrency market capitalization to just $810 billion. Note that in November 2021, the global cryptocurrency market capitalization was well above $2.5 trillion – which means that the crypto capital is worth less than half of what it was last year.

With the loss of more than $1.3 trillion worth of crypto, the skepticism around the markets is rising.

The Council Worries About the Impact of Crypto Markets on The Traditional Finance Systems

The real thing that the Council is worried about is that the regulatory wall that prevents the issues of the cryptocurrency market to spill over to the traditional assets market has started to weaken.

“The current regulatory framework and the limited scale of cryptocurrency asset activities have helped largely insulate traditional financial institutions from the acute instability of the crypto-asset ecosystem,” – The Council said in its report.

However, the crypto market participants are also investing in traditional assets and have created multiple interconnections. These include:

The issuers of stablecoin keep their reserves with traditional financial institutions.
Cryptocurrency exchanges offer the same level of leverage trading and asset custody utilities as traditional financial institutions.

The council predicts that the rise of more cryptocurrency assets with low-entry barriers will entice more investors. As the number of cryptocurrency traders rises, the difference between traditional finance and cryptocurrency markets will start to blur. And with the arrival of traditional money services such as lending, that distinction has already begun to drop.

Twitter is Split About More Legislations in Crypto – But We Aren’t

FTX hearing has been a ride for many crypto watchers and even those who only have a passing interest in the blockchain economy. And when Gotham’s Jim Gordon (Ben McKenzie) testified against FTX in the hearing, the entire Twitter-sphere was surprised.

Ben McKenzie says the Crypto Industry relies on “misinformation, hype, and fraud. Cryptocurrencies are not currencies.” 🤔#Crypto #Cryptocurrency #CryptoNews #CryptoRegulation #FTT #FTX #SBF #SamBankmanFried pic.twitter.com/mhryEE5DYJ
— 🥷 Gokhshtein Media (@gokhshteinmedia) December 15, 2022

While many crypto skeptics loved his approach of making things easier for people to understand cryptocurrencies, the crypto bros derided him for being “just another actor.” However, even the most prolific cryptocurrency experts have started to see the merit behind his words. And as a result, Crypto Twitter is divided into two camps – one that’s too bullish about it sees no fault, and the other that has started to demand cryptocurrencies that have more utilities than being just another tradeable asset.

The speculative nature of the cryptocurrency market has allowed many pump-and-dump stocks and other fraudulent projects to emerge. With no protection against them, beginner-level investors and sometimes even veteran traders fall into the entrapment of such projects. And what doesn’t help is the fact that there aren’t many regulations to watch over the cryptocurrency exchanges and hold them accountable.

Therefore, now more than ever, the cryptocurrency world needs the emergence of regulations. If more investors feel secure while trading crypto, the blockchain adoption rate will increase. And with the increase in blockchain adoption rate, better technologies will emerge.

The emergence of better technologies will make Web 3 and user custody more accessible than before – which, in the long run, is good for everyone.

That is why it is important that there is a balanced view of cryptocurrency. They must be more than mere speculative assets. They must be more valuable. And above all, they must provide users with a sense of security when trading.

Cryptocurrencies have value, but to realize it, we have to get rid of the bad actors, and the introduction of more regulations is the way to do that.