In a recent report, the United States Government Accountability Office (GAO), has assessed the requirement of crypto regulation in the nation. The authorities have stated that there’s a significant regulatory gap for crypto assets and has addressed the same in its report.
The U.S. Government Accountability Office is an independent, nonpartisan government agency within the legislative branch that provides auditing, evaluative, and investigative services for the United States Congress. It is the supreme audit institution of the federal government of the United States and is commissioned by Representatives Maxine Waters (Democrat, California) and Stephen Lynch (Democrat, Massachusetts) of Financial Services Committee.
As per the agency’s report, there’s a significant regulatory gap for crypto assets and has suggested a whole-of-government approach to addressing it. The report stated that currently no federal financial regulator possess the required power to oversee the sector. Quoting the report:
No federal financial regulator has comprehensive authority to regulate the spot market for crypto assets that are not securities.
While the report claims that there’s no financial regulator possessing the necessary authority, a March 2023 executive order from President Biden suggests a unified approach to regulate the sector. The order had tasked the Treasury’s Financial Stability Oversight Council to lead the development.
In the report, the GAO suggested a formal coordinated mechanism to comprehensively address blockchain-related risks. The report writes:
A formal coordination mechanism for addressing blockchain-related risks, which could establish processes or time frames for responding to risks, could help federal financial regulators collectively identify risks and develop timely and appropriate responses.
One of the most specific concerns highlighted by the GAO is that there’s a major gap in regulatory authority over stablecoins. To this, the report calls the U.S. financial regulatory structure fragmented, particularly with regard to standards surrounding reserve levels and public disclosure of reserves.
Additionally, the agency concludes that there’s a need for regular audits of and public disclosures of reserve assets and audit results and for establishing a legal framework regarding redemption rights.
Furthermore, the report adds that amid the growing decentralized finance (DeFi) market size, the risk to the crypto economy and broader macro market is also increasing. Simultaneously, an absence of intermediaries in DeFi raises regulatory concerns about compliance and consumer protection.
The report adds that as these services become more interconnected and decentralized, the risks, including financial shocks and illicit finance will have the chances to escalate. Hence, to assess the risks involved at the earliest, the report calls the regulatory bodies like the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) to evaluate how existing regulations might apply to these platforms.
Further, the report says that major U.S. financial regulators – the Consumer Financial Protection Bureau (CFPB), the Commodity Futures Trading Commission (CFTC), the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve System, the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and the Securities and Exchange Commission (SEC) should jointly establish or adapt an existing formal coordination mechanism.
According to the report, this collaborative mechanism would be used to collectively identify and respond in a timely manner to the risks posed by blockchain-related products and services. However, as of now only the NCUA agreed with the recommendations made to them.
The National Credit Union Administration is an independent federal agency that insures deposits at federally insured credit unions, protects the members who own credit unions, and charters and regulates federal credit unions.
On the other hand, others regulators have neither agreed nor disagreed with the recommendations, but noted existing coordination efforts through various forums, such as the Financial Stability Oversight Council (FSOC), the President’s Working Group, and some international groups.
While the crypto regulation has been one of the most talked topic in the US, the implications from this report have echoed in the chambers previously as well. Considering the imminent divide between the regulators and lawmakers, cooperation has been one of the most required subjects.
As reported by Todayq News, Summer Mersinger, CFTC commissioner at the DC Blockchain Summit, highlighted the importance of interference from Congress to ensure cooperation with the CFTC when drafting crypto legislation especially to call for cooperation from the SEC.
More often than not, the SEC and CFTC have been found conflicting in their views over what cryptocurrencies or digital assets constitute commodities or security. Hence, it is very important for the regulators to cooperate with each other so that there is more clarity to the crypto bills awaiting passage in Congress.