Crypto Needs More Rules and Better Enforcement, Regulators Warn

Regulators are also calling for new authority that would give Washington better visibility across the entirety of crypto businesses, including the ability to look at various, seemingly disconnected entities in order to better understand risks and conflicts. The report noted that “crypto-asset businesses do not have a consistent or comprehensive regulatory framework and can engage in regulatory arbitrage.”

The report calls on lawmakers to create new rules that address how crypto exchanges and platforms expand, noting that many add services by acquiring intermediaries without considering conflicts and limits on business overlaps that exist in traditional finance, raising stability risks and potentially hurting investors.

The report noted that certain characteristics of crypto have “acutely amplified instability” within the blockchain ecosystem, including lack of basic risk controls to protect against runs, excess availability of leverage and prices that swing quickly and “appear to be primarily driven by speculation rather than grounded in current fundamental economic use cases.” Regulators also fear that risky interconnections between crypto businesses and a few concentrated providers of key services undermine the ostensibly decentralized nature of blockchain.

“These vulnerabilities are partly attributable to the choices made by market participants, including crypto-asset issuers and platforms, to not implement or refuse to implement appropriate risk controls, arrange for effective governance, or take other available steps that would address the financial stability risks of their activities,” the reports states.

Treasury Secretary Janet L. Yellen, who chairs the panel, said in a statement that 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.” Officials hope the publication will serve as a guide for lawmakers and regulators as they develop a more comprehensive regulatory framework for crypto markets.

The government, unlike the crypto industry, doesn’t tend to move quickly, but the report, which outlines both general principles and specific remedies, is a significant step, industry observers said.

In it, the F.S.O.C. recognizes the increasingly centralized nature of an industry that promotes decentralization and provides some of the clarity that blockchain businesses have been clamoring for, said Eswar Prasad, a Cornell University professor and author of “The Future of Money,” who engaged with regulators as they put together the report. “It certainly moves us forward.”

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