US Regulators Warn that Bitcoin, Other Cryptocurrencies Pose Significant Financial Stability Risk

US Federal Reserve Chief Jerome Powell recently noted that cryptocurrencies pose significant risks to financial stability. Powell stated on Thursday (May 20, 2021) that greater regulation of crypto assets may be necessary.

As reported by Reuters, the US Treasury Department cited concerns about wealthy people taking advantage of the loosely regulated crypto space to avoid taxes. The Treasury Department also stated that large digital currency transfers must be reported to relevant authorities.

These new announcements have come at a time when Bitcoin (BTC), the leading virtual currency, has been experiencing extreme levels of volatility, with its price declining around 30% on Wednesday (May 19, 2021). The dramatic price drop came right after Chinese authorities stated that they’ll be imposing more restrictions on the crypto industry.

Powell emphasized that cryptocurrency transactions pose considerable risks. He also provided a timetable as the Federal Reserve looks into the feasibility of issuing its virtual currency.

While discussing the benefits of recent advances in Fintech, Powell cautioned that digital currencies, stablecoins and other similar innovations could also “carry potential risks to those users and to the broader financial system.”

As the tech matures, so should our attention and focus on the appropriate regulatory guidelines. This may include paying more attention to private-industry payments innovators who do not fall under the existing regulatory framework (which is currently applied to banking institutions, investment companies, and various other financial intermediaries), Powell noted.

His recent statements suggest that the Fed is quite serious about stricter crypto regulations. The US (and regulators in other jurisdictions) have been forced to address issues related to the rising popularity and market capitalization of Bitcoin (BTC) and other cryptos, particularly as the US begins looking into issuing a digital US dollar.

The Fed and Treasury believe virtual currencies, which have recently managed to reach a $2.5 trillion market cap, to be somewhat like art, gold or some other form of speculative asset.

A central bank digital currency (CBDC), however, provides holders a “direct” claim on that central bank, which is similar to holding onto paper currency notes.

Powell confirmed that the Fed would publish a discussion paper in the coming months. It will aim to cover digital payments, with a special focus on the feasibility of a CBDC. The Fed will be seeking comments/feedback as well.

Powell added that “to date, cryptocurrencies have not served as a convenient way to make payments, given, among other factors, their swings in value.”

The Treasury also said that cryptocurrency risks, such as new ways for the wealthy to transfer taxable funds into the loosely regulated crypto sector is a major concern.

The US Treasury Department stated:

“Cryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion.”

Its proposal was shared as part of a policy report outlining the Biden Administration’s $80 billion IRS enforcement proposal to increase revenue collection. According to the proposal, there may be additional resources for the IRS to deal with crypto assets,

There have been reports of $10,000+ crypto transfers that need to be reported. This is the same requirement for traditional bank transfers. The Treasury also suggested that digital currency exchanges and custodians need to report transactions to the IRS that are related to bank interest, dividend and brokerage-type transfers.

The specific reporting guidelines and requirements, depending on how they’re put together, may help the US government gain more insights regarding the operations of US firms that have been extorted to pay large ransoms to malicious hackers.

Law enforcement agencies and private-industry cybersecurity professionals have expressed concerns that the lack of transparency around ransomware attacks has led to their consistent occurrence over the years.

Powell has previously noted that it’s “far more important to get it right than it is to do it fast” (presumably addressing the fact that countries like China have taken the lead in developing a digital currency).

At present, the Boston Fed is working cooperatively with the Massachusetts Institute of Technology (MIT) in order to research the tech that may be used for a CBDC. The researchers are expected to release their findings this year.

Congressional action is necessary before such a virtual currency may be developed and issued.

On Thursday (May 19, 2021), US Securities and Exchange Commission (SEC) Chair Gary Gensler stated that he’d like more regulatory guidelines for crypto trading platforms, including those that only trade BTC but don’t need to register with the SEC (at present).

While attending the Financial Industry Regulatory Authority‘s annual conference, Gensler remarked:

“This is a quite volatile, one might say highly volatile, asset class, and the investing public would benefit from more investor protection on the crypto exchanges.”

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