digital asset financial stability risks

On October 3, 2022, the Financial Stability Oversight Council (“FSOC”) – a collaborative body formed under the Dodd-Frank Act composed of state and federal regulators and tasked with identifying risks and responding to emerging threats to financial stability – released its 100+-page Report on Digital Asset Financial Stability Risks and Regulation (the “Report”). In the Report – a response to President Biden’s Executive Order 14067 on digital assets, which, among other things, directed various agencies to promote innovation and R&D while calling for measures to mitigate risks – the FSOC reviewed what it deems to be, “specific financial stability risks and regulatory gaps posed by various types of digital assets.”

At the core, the FSOC Report is a call to arms, with the council citing what it sees as a host of regulatory and industry shortfalls that have not kept up with the rapid growth of digital asset activities.  For example:

  • The FSOC report noted that stablecoins and the lending and borrowing on digital asset trading platforms are now an “important emerging vulnerability.”
  • The Report’s basic thesis is that crypto-asset activities “could pose risks to the stability of the U.S. financial system if their interconnections with the traditional financial system or their overall scale were to grow without being paired with appropriate regulation, including enforcement of the existing regulatory structure.” This point was reiterated in the Federal Reserve’s November 2022 “Financial Stability Report,” which presents the Federal Reserve Board’s current assessment of the stability of the U.S. financial system.
  • The FSOC Report also expresses the position that federal comprehensive digital asset legislation is needed to address complex, systemic economic risks, as, in its opinion, “many crypto-asset platforms are not registered or chartered under regulatory frameworks that would address these risks.”