U.S. Treasury encourages new laws to address crypto regulation gaps

FILE PHOTO: Representations of cryptocurrencies Bitcoin, Ethereum, DogeCoin, Ripple, Litecoin are placed on PC motherboard in this illustration taken, June 29, 2021. REUTERS/Dado Ruvic/Illustration

(Reuters) - The Financial Stability Oversight Council (FSOC), a U.S. regulatory panel comprising top financial regulators, on Monday recommended that Congress pass legislation addressing risks digital assets pose to the financial system, including bills to bolster oversight of crypto spot markets and stablecoins.

In a report following U.S. President Joe Biden's executive order this year "on Ensuring Responsible Development of Digital Assets," the panel identified three gaps in the regulation of cryptocurrencies: limited oversight of the spot market for tokens that are not securities; opportunities for regulatory arbitrage, or taking advantage of favorable rules; and whether crypto firms should be allowed to integrate multiple services traditionally provided by intermediaries, like broker-dealers and clearing houses.

The report was published after an FSOC meeting on Monday.

In a statement, Treasury Secretary Janet Yellen said the 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.

Although FSOC has previously urged Congress to regulate issuers of stablecoins like banks, Monday's report included several new recommendations for legislators, including that they create a federal framework for stablecoin issuers to address market integrity and consumer protection.

FSOC's report follows a slate of others that were released last month in connection with the White House's executive order. In September, the Biden administration published a series of reports recommending that U.S. government agencies double down on digital asset sector enforcement and identify holes in regulation.

It remains unclear when Congress might pass crypto-related legislation, although several bills have been introduced to address stablecoins and digital commodities regulation.

The FSOC report also suggested Congress pass a bill to provide rulemaking authority to federal financial regulators over the spot market for cryptocurrencies that are not securities, in order to address conflicts of interest and abusive trading practices.

Lawmakers should also consider legislation that gives regulators authority to supervise activities of crypto firms' affiliates and subsidiaries, which FSOC said could address regulatory arbitrage, the report said.

(Reporting by Hannah Lang in Washington; Editing by Josie Kao)

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