Treasury warns that digital assets may threaten the stability of the economy

On Monday, the Treasury Department warned that unregulated cryptocurrencies could pose a risk to the US financial system.

The warning was part of the first major public report issued by the Treasury’s Financial Stability Oversight Board on digital assets. The board identified digital or “crypto” assets such as stablecoins as well as lending and borrowing on industry-specific trading platforms as an “important emerging vulnerability.”

“The report concludes that crypto-asset activity can pose risks to the stability of the US financial system and stresses the importance of appropriate regulation, including enforcement of existing laws,” Treasury Secretary Janet Yellen said. “It is imperative that government stakeholders work collectively to make progress on these recommendations.”

The board first identified digital assets as a priority area in February.

The global market capitalization of crypto assets peaked at around $3 trillion last November, and they make up nearly 1% of global financial assets, according to the report. Although the impact is relatively small in the larger global financial system, digital finance is rapidly gaining popularity and is being manipulated by criminals for illicit gain, according to the report.

Earlier this year, the Treasury Department issued a series of penalties Against the Russian oligarchy and some Russian banks and other organizations for using crypto assets to evade sanctions. In September, the agency banned all property in the possession or control of US persons for 22 individuals and two entities that helped digitally finance the Russian invasion of Ukraine.

stablecoinsIt is a type of cryptocurrency that is popular in the foreign exchange market, and is also widely used for speculating on crypto assets, Rohit Chopra, director of the Consumer Financial Protection Bureau, said during the FSOC meeting on Monday.. Created to achieve price stability, the stablecoin price is linked to stable currencies, commodities or other crypto assets.

The group recommended legislation that would enable financial regulators to more aggressively oversee the industry as well as expand banking testing to require federal and state agencies to look into services offered by crypto asset service firms.

The FSOC, formed after the 2008-2009 financial crisis, identifies emerging threats to the country’s financial security and organizes a coordinated response across US financial regulators. Under the Dodd-Frank Act, the FSOC is authorized to supervise and regulate non-bank financial firms, financial market facilities and payment, clearing or settlement activities to address potential weaknesses in financial stability.

The report states that so far, the FSOC has not used this authority to regulate the cryptocurrency market.