Yesterday, the US Financial Stability Oversight Council (FSOC) released a report on the Financial Stability Risks and Regulation of Digital Assets. It identified three regulatory gaps and made several recommendations.

The first problem is that cryptocurrencies that are not classified as securities lack a direct regulator. Therefore, he proposes that Congress enact legislation to close that gap. While not suggesting which regulator is appropriate, the report notes that the Commodity Futures Trading Commission (CFTC) has experience primarily dealing with wholesale markets rather than retail investors.

While the CFTC is responsible for crypto derivatives, it can only take cash market enforcement action if there is manipulative or fraudulent behavior, but it is not the cash market supervisor or regulator. The report was only careful to classify Bitcoin as a non-security crypto asset, referring to “possibly another non-security crypto asset.”

Meanwhile, Congress has already taken steps in that direction with Senator Stabenow’s proposal for a bill on the regulation of digital products like Bitcoin, the Digital Products Consumer Protection Act, which has already had a reading before the Senate Agriculture Committee.

The second regulatory gap is that of regulatory arbitrage and the lack of oversight by any regulator over a cryptocurrency platform that could have multiple subsidiaries.

Third, most cryptocurrency exchanges and other platforms deal directly with retail investors. This not only raises consumer protection issues, but also financial stability issues. With conventional assets, there is a division of activities between the stock market and the brokers. The biggest risk is related to the leverage that is usually provided by brokers rather than the exchange. The FSOC cares about leverage on crypto exchanges.

“Automated liquidations without appropriate regulatory safeguards are likely to be procyclical, exacerbating balance sheet difficulties at a time of falling asset values ​​and potentially creating a cascade of automated liquidations,” the report says.

The CFTC has already begun exploring the issue of exchanges dealing directly with the public, following a filing by FTX US, which holds a derivatives license through its LedgerX subsidiary.

Yesterday’s FSOC report makes ten recommendations, including continued enforcement. We did not see a request for clarity on what crypto assets are considered securities, and that would not be a stability issue anyway.

The main recommendations were:

• pass legislation to provide oversight over spot cryptocurrency markets
• stablecoin legislation
• legislation allowing a regulator to oversee an entire crypto platform, including visibility and oversight of subsidiaries and affiliates
• service provider regulation
• to study the possible vertical integration of crypto asset platforms.

The FSOC’s ten voting members include the heads of major financial regulators, including the Treasury, the Federal Reserve, the SEC, the CFTC, the OCC and the FDIC.