"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," Ms. Yellen said in a news release. "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."
In the report, the council identifies three gaps in U.S. crypto regulation: limited federal oversight of the spot market for cryptocurrencies that are not securities; opportunities for regulatory arbitrage; and whether crypto platforms should be allowed to vertically integrate services provided by intermediaries, such as broker-dealers.
To address these gaps, the FSOC recommended Congress pass a bill to provide federal financial regulators with rulemaking authority over the spot market for digital assets that are not securities.
Lawmakers should also consider legislation creating "a comprehensive federal prudential framework for stablecoin issuers that also addresses the associated market integrity, investor and consumer protection, and payment system risks, including for entities that perform services critical to the functioning of the stablecoin arrangement," the report stated.
The council suggested developing legislation that would give regulators the ability to supervise the affiliates and subsidiaries of crypto firms as well, according to the report.
"The U.S. regulators are clearly treating the crypto markets as one of their top priorities which, counterintuitively, is a good sign," said Anto Paroian, CEO and executive director at the cryptocurrency hedge fund ARK36, in a statement.
However, Mr. Paroian added, "the report doesn't really tell us anything that we haven't known already," and the industry has handled issues without regulator intervention up until this point.
"What the industry would benefit from are laws that could prevent bad actors from harming investors while, at the same time, allowing the crypto space to do what it does best — innovate and improve the largely outdated financial system of today," Mr. Paroian said.
Several members of Congress have recently introduced bills to regulate digital assets, but the path forward remains unclear as the industry still grapples with clearly defining what constitutes a digital commodity vs. a digital security.