Crypto Poses Risks to the Stability of the US Financial System: FSOC

• Crypto poses risks that could endanger US financial stability, the Financial Stability Oversight Council said.
• The group identified three areas of the crypto market where regulators needed tighten rules.
• Failure to regulate crypto could cause “harm to the financial system and to individuals,” Janet Yellen said. 

Cryptocurrencies pose risks to the stability of the US financial system, and gaps in regulation need to be filled, US Treasury Secretary Janet Yellen said at a meeting of the Financial Stability Oversight Council on Monday.

Yellen, who leads FSOC, has previously warned of the dangers digital assets pose to the broader financial system. Shortly after the fall of Luna and its associated stablecoin Terra, she told policymakers that crypto risks were growing rapidly, but did not yet pose a “real threat” to financial stability.

In her most recent remarks, she urged policymakers to address those threats head on, pointing to a recent report from the Council that found crypto, left unregulated, was a grave risk to financial stability and to investors active in the space. 

In particular, FSOC recommended three areas to be addressed, urging rules to be tightened on crypto firms, crypto trading platforms, and the spot market for crypto.

“We have seen very significant shocks and volatility within the crypto-assets system, particularly over the last year. Crypto-asset prices appear to be primarily driven by speculation rather than grounded in current fundamental economic use cases,” the report said.

The warning comes amid a rough year for crypto, triggered by Terra’s crash in March. That cascade of defaults and bankruptcies throughout the digital assets industry, leading crypto firms like Celsius, Voyager, and Three Arrows to declare bankruptcy and prevent customers from withdrawing funds. Since then, the Securities and Exchange Commission has been pushing to the tighten the reins on the digital assets market, nearly doubling the staff in its crypto unit in May, and chief Gary Gensler has made crypto a particular area of focus, referring to the industry as the “wild west” in comments this year. 

“Innovation is also one of the hallmarks of a vibrant financial system and economy. But as we have painfully learned from history, innovation without adequate regulation can result in significant disruptions and harm to the financial system and to individuals,” Yellen added.