Have you tried to explain crypto to anyone lately? Chances are, even if you feel you have a firm grasp on what it is, it can be difficult to put it into simple terms for the uninitiated.
As Cryptocurrencies remain a mystery to many, the landscape of these markets continues to change. It’s a lot to understand and keep up with, even as more fluctuations make headlines.
As of today, an article on Coindesk.com describes an upturn in a few impactful places. Namely, for the first time in about three weeks, Bitcoin (BTC) shows an increase of close to 5% in value, putting it above $20,000. Also, we see that ether, (ETH) is at its highest point since the Merge, showing a hike of nearly 11%.
The trend we are seeing is positive for other stocks, too, such as MicroStrategy (MSTR) and Coinbase (COIN), both up 10%. Crypto miners are doing even better with increases 11%-18% for Bitfarms (BITF), Hut 8 (HUT), Riot Blockchain (RIOT), and last but not least, Marathon Digital (MARA).
Are these developments good news, or just more of the volatility in crypto that led to the FSOC’s findings after concerns calling for stronger regulations?
Treasury Department’s Press Release
On October 3rd, the Treasury Department issued a press release warning that cryptocurrency could pose a risk to the nation’s financial system.
The warning was based on a report by the Financial Stability Oversight Council (FSOC). The council was formed after the 2008-2009 financial crises to identify potential threats to the country’s financial security.
The report was created in response to President Biden’s executive order on digital assets. The potential risk to the financial system has grown from the increase in cryptocurrency. Additionally, increased volatility in cryptocurrency has caused regulators to address the need for regulation.
The FSOC report provided detailed findings explaining the reasons for cryptocurrency’s threat to the U.S. financial system.
According to Yellen
“Digital assets have grown significantly in scale and scope over recent years. They have attracted a large amount of capital and interest from both retail and institutional investors,” said Secretary of Treasury Janet Yellen in a statement concerning the report. “At the same time, we have seen very significant shocks and volatility within the crypto-assets system, particularly over the last year.”
The report exposed gaps in the regulation of crypto assets which could be a significant threat to our financial system.
Findings: Four Key Issues
Instability within the crypto-asset ecosystem, including a lack of risk controls to prevent run risk or excessive leverage.
Prices are driven by speculation.
Repeated substantial declines.
Crypto tokens are associated with risky business profiles.
Many crypto-asset activities lack basic risk controls to protect against run risk or to help ensure that leverage is not excessive.
Spot markets for crypto-assets that are not securities are subject to limited direct federal regulation. Consequently, those markets may not provide regulations to protect investors and the economy.
The report stated that crypto-asset prices appear to be primarily driven by speculation rather than grounded in current fundamental economic use cases, and prices have repeatedly recorded significant and broad declines.
Recommendations for Non-Security Digital Assets
The report recommended legislation that would delegate financial regulators authority over the spot market for digital assets that are not considered securities. Additionally, the legislation would give regulators authority to supervise all the affiliates and subsidiaries of crypto-asset entities and study potential vertical integration by crypto-asset firms.
The council is headed by Treasury Secretary Janet Yellen and includes Federal Reserve Chairman Jerome Powell.
“This report provides a strong foundation for policymakers as we work to mitigate the financial stability risks of digital assets while realizing the potential benefits of innovation,” said Secretary of the Treasury Janet Yellen. “It is an important contribution to the set of reports that Treasury and our interagency partners have produced as part of President Biden’s executive order. The report concludes that crypto-asset activities could pose risks to the stability of the U.S. financial system and emphasizes the importance of appropriate regulation, including enforcement of existing laws. It is vital that government stakeholders collectively work to make progress on these recommendations.”
Jerome Powell has recently said stablecoins need better regulation as they become used by more consumers. Powell had said that “acting now will allow us to support responsible financial innovation while preserving financial stability.”
Yellen said the Treasury recommends that the U.S. “advance policy and technical work on a potential central bank digital currency, or CBDC, so that the United States is prepared if CBDC is determined to be in the national interest.”
The report recommended that its members take into consideration a set of principles and emphasized the importance of continued enforcement of existing rules and regulations. Additionally, the report recommended bolstering its members’ capacities related to the analysis, monitoring, supervision, and regulation of crypto-asset activities.
It’s not currently known when Congress might pass crypto-related legislation. However, several bills have been introduced to address stablecoins and digital commodities regulation. We know that SEC Commissioner Hester M. Peirce said recently that Congress should pass legislation which would provide regulatory clarity in the market of cryptocurrencies. Clearly, this situation will continue to evolve.