The US Department of Treasury has published the annual FSOC report. The Financial Stability Oversight Council convenes every year to review potential systemic risks to the financial services industry. FSOC members include the top financial services regulators including the SEC, the Fed, the OCC, etc. There are also non-voting members that participate in an advisory capacity including representatives from the states.
As was reported earlier today, the report addresses the Fintech sector with much written about the emerging digital assets (cryptoassets in Europe) sector. Digital transformation in the financial services sector has picked up pace during COVID – mostly for the better. But of course questions persist as to possible risks and what must be done to mitigate these challenges.
Below are multiple comments received by industry insiders addressing this year’s FSOC report.
Jackson Mueller, Director of Policy and Government Relations at Securrency, said the FSOC report highlights potential opportunities and risks associated with this space.
“The insights drawn from this assessment reflect what appears to be common thinking among global regulators and multilateral institutions. Nonetheless, the report does focus attention on the role of third-party service providers and potential risks posed to particular financial institutions and the broader financial services system. This focus comes on top of efforts underway in Europe to understand the role of such providers under the proposed Markets in Crypto Assets (MICA) regime, and the inclusion of certain service providers in the recently announced Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act. If we’re to draw anything from the FSOC report and other recent efforts, it is that regulators and policymakers will continue to scrutinize the role these providers play in the digital assets space and broader financial services ecosystem and how these evolving roles may necessitate changes in regulatory structures.”
Amber Ghaddar, founder of AllianceBlock, said that last year’s summary is quite similar to this year’s summary regarding digital assets:
“It is interesting that there is little to no mention of digital assets as an investment but rather the focus is on the technology of underlying digital assets and its use for real-time payments. It is important to keep in mind the fact that the US lags behind Europe when it comes to payments infrastructure.”
Ghaddar said that in the UK there is the FPS network (FasterPaymentService) since 2009, which allows funds to be transmitted within minutes among the participating banks, accounting for more than 95% of payment traffic. The cornerstone of the report is real-time payments provided by stablecoins:
“They mention the risk of disruptions to the stablecoin system if a stablecoin were to become widely used and how this could transmit to the financial system as a whole. This is something we can all agree on; stablecoins need to be regulated and monitored to make sure the 1:1 rate holds and is backed by the correct amount of currency or commodity,” said Ghaddar. “I believe the report should have also mentioned digital assets as an investment and how to regulate and monitor access to consumers, specifically retail consumers in what is known as a high volatility market. Margin trading in the crypto space, for example, is far beyond what we have in the equity space for retail investors and this can lead to unfortunate results when badly leveraged. Firms offering digital assets should be, if not regulated, at least pushed closer to the regulator rather than having to persist in regulatory limbo. The more interactions there are between crypto startups and the regulators the easier it is for both to see that the other is not the enemy.”
Ghaddar added that in the 2019 report there was no mention of digital identity something the surfaced in 2o2o:
“Digital identities can not only be applied to KYC/AML; individuals can have digital data passports for their health records, education, work history, or their online preferences to cite a few; the possibilities are limitless.”
Erick Pinos, Americas Ecosystem Lead at Ontology, commented:
“Aside from a small number of startups, companies have been hesitant to explore digital assets and identity, partly due to the uncertainty around what kinds of regulations the US will impose on these technologies. This report is one step closer to clarifying the regulations we can expect the US to enact around digital assets and identity, which should help companies explore these areas in a compliant way. With regards to identity, companies should take care to make sure their products and protocols meet the standards set by governing bodies like W3C to minimize the risk of violating any regulations that are introduced. Industry leaders should also be proactive in helping educate policymakers about these technologies so that the regulations that are introduced help the space flourish rather than flounder.”
Pinos said it will not be helpful if Treasury introduced regulations that restrict the kinds of digital assets users may own:
“Instead, regulations should be aimed at companies and define legitimate digital asset and identity ecosystems to crack down on the ponzi schemes, scams, manipulation, and predatory marketing practices that are proliferating in the industry.”
Philippe Bekhazi, CEO of Stablehouse, said stablecoins and digital assets are being adopted at a pronounced rate by institutional finance players. He said the Bitcoin market is hovering around all-time highs with little downward pressure while public companies acquire BTC.
“Stablecoins have had a 4x increase in market cap this year, and are being used widely for trading, value store, and trade finance,” Bekhazi stated. “This report confirms that BTC, crypto-app assets, and stablecoins are gaining acceptance and therefore deserving of regulation. However, the report cites that if cryptoassets are to gain widespread payment usage, this would demand a closer inspection. The report clarifies that if there is widespread utilization of crypto assets, that reliability and stability would be critical to consumers.”
Bekhazi believes the report is more observational and that deeper scrutiny is necessary:
“The report does not seem to make substantial plans for regulation but seems to imply they should and will come. The report also appears to take a US-centric view, conveying no real appreciation for the decentralized nature of crypto assets. The report focuses on ‘digital assets’ as a collective, doing little to distinguish bitcoin, which is too important a trend to be absent from the discourse. These missing links will need to be addressed in any future regulation of the space. The positive view of stablecoins across countries and society is growing. While recognizing that many nations have a critical eye on stablecoins, however, the report seems to gloss over the likelihood that the growth rate of stablecoins may continue. At Stablehouse, we take the view that we cannot see any reason for growth of digital assets to slow down in the near-term. The report also emphasizes the need for stability in a payment network and fortifying that infrastructure — an area in which stablecoins will be integral.”
Bo Oney, Executive Vice President of Operations & Head of Compliance at CoinSource, wrote extensively on the FSCO report stating that the most important recommendation by the council came at the end of the report.
“that federal and state regulators continue to support responsible innovation by examining the benefits of, and potential risks to the financial system posed by, new and emerging uses of digital assets and distributed ledger technologies,” and encouraging, “continued coordination.”
Oney is of the opinion that the ongoing challenge for the virtual asset service provider industry is the lack of transparency, inclusiveness, and consistency from regulators for the spectrum of services and business models that are currently provided.
“The definition of money transmission as it relates to virtual assets and specific business models, is wildly inconsistent from state-to-state, as are requirements and enforcement, at the moment. This kind of inconsistency not only serves to stifle and distract from innovation, it allows for less scrupulous businesses with deceptive and dangerous models to exist in the gaps created by that inconsistency,” said Oney. “The vast majority of responsible virtual asset service providers have long been beating at the doors of regulators, valiantly trying to collaborate with them to adjust regulation to best fit the needs of these financial innovations in meaningful ways that will not damage the purpose of the innovation and the value it provides to consumers and investors. My hope is that this encouragement by the council accelerates this type of collaboration to create necessary fair regulations that actually fit the virtual assess industry.”
Oney said that service providers should do more to close gaps while collaborative regulation takes place though, especially in the virtual asset kiosk industry.
“Some level of collaboration and self-policing by responsible businesses within the industry could go a long way to achieve this goal and give a greater voice to effectively collaborate with regulators. Minimum standards and best practice endorsed by industry experts would go a long to achieve some of the same goals and protect the industry as whole in this regulatory interim period of uncertainty and inconsistency across the country.”
Standards created by the industry should be pursued. This can solve the challenge of creating consistent, national regulation as well as enforcement – good for regulators and industry operators.
“As with the current inconsistency with the regulation in enforcement, the exclusion of reasonable access to traditional financial markets and institutions only serves to create gaps by which bad actors, and dangerous business models seem to thrive,” Oney said. “Access to fair regulation and responsible financial service providers goes hand-and-hand with businesses as it does with consumers. Hopefully, the recommendations of the council in this report continues to create better access for both in the name of continuing responsive financial innovation at an exponential rate.”
The FSOC Annual Report may be downloaded here.