The United States Government Accountability Office (GAO), an oversight agency of Congress, has released a report finalized in June on the regulatory framework for the use of blockchain in finance.
The 77 page report was requested by Reps. Maxine Waters and Stephen Lynch before the midterm elections, when they were chairman and ranking members of the House of Representatives Financial Services Committee, respectively. The report surprisingly found that more regulation is needed. The agency has a framework for evaluating regulatory reform proposals developed in 2009.
The report points to crypto asset trading platforms and stablecoins as unregulated products, but examines the policies and activities of regulators without straying into the “territory wars” controversies related to the definition of securities. As such, it identifies the spot market for nonsecurity crypto assets as the center of the regulatory gap and states:
“By appointing a federal regulator to provide comprehensive federal oversight of the spot market for insecure crypto assets, Congress can reduce financial stability risks and better ensure that platform users receive protection.”
Traditional assets in that category enjoy strong regulation, the report notes. Crypto assets are subject to limited scrutiny, such as from the Department of the Treasury’s Financial Crimes Enforcement Network and through state remittance licenses.
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Stablecoins require regulation regarding reserve composition, auditing and disclosure, and redemption rights. The report said the current regulations were a hodgepodge of actions by the Securities and Exchange Commission, the Commodity Futures Trading Commission and stated that did not equate to “consistent and comprehensive prudential regulation and oversight.”
Decentralized finance can be managed in an inverse relationship to the degree of decentralization, said GAO. When an ecosystem is fully decentralized, no individual can be identified as responsible for developing, operating or managing it. It may also span multiple regulatory jurisdictions within its operations.
Blockchain technology—eg #cryptocurrency—can offer faster and cheaper financial transactions. But the recent collapse in prices & bankruptcies have raised concerns about gaps in federal regulations that could harm consumers. Our new report & video explores: https://t.co/1vyIgZVaYi pic.twitter.com/nxHrk1g5dQ
— US GAO (@USGAO) July 24, 2023
Moving closer to the issue of turf wars, the report identifies the need for greater coordination between regulators and notes complaints from market participants about the slow response of regulators to innovations in the market. The report notes that the Treasury’s Financial Stability Oversight Board was tasked with leading efforts to create a unified approach to crypto asset supervision by the March 2022 Executive Order on Ensuring the Responsible Development of Digital Assets.
The report recommends that the seven regulatory bodies concerned “co-develop or adapt existing formal coordination mechanisms […] to collectively identify the risks posed by blockchain-related products and services and formulate timely regulatory responses.” What’s more:
“This mechanism could include a formal planning document setting out the frequency of meetings and a process for identifying risks and responding to them within an agreed time frame.”
The National Credit Union administration said it agreed with the findings, while others either disagreed or disagreed. GAO is the country’s top auditor. While its recommendations are not legally binding, the century-old institution’s findings carry considerable moral weight.
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