As the crypto sector continues to evolve, regulators are considering enhanced oversight even while Congress crafts tailored legislation. Specifically, the Financial Stability Oversight Council (FSOC) holds unique powers to designate companies as systemic risks, subjecting them to increased regulation.
While FSOC has yet to target crypto firms, their recent warnings have raised concerns of potential overreach. Members of Congress and industry representatives caution against bypassing legislative efforts already underway. They argue the crypto sector has not caused stability issues thus far.
Created after the 2008 crisis, FSOC can label companies as systemic risks if their failure could significantly impact the wider financial system. This saddles firms with compliance demands and Fed supervision. FSOC recently resumed full use of this power after the Trump administration curtailed it.
So far, FSOC has mainly highlighted crypto, especially stablecoins, as emerging threats in annual reports. Their latest warning stated they could take direct action “in the event comprehensive legislation is not enacted.” Some see this as undue pressure on lawmakers crafting regulatory frameworks.
Regulatory Hurdles For Crypto Firms
Industry lawyer Ji Kim considers it unlikely FSOC would actually designate a crypto firm given the high legal bar involved. The council itself admitted virtual currencies do not currently constitute a systemic risk. A Chamber of Commerce representative suggested FSOC may only be saber rattling for legislative leverage.
In any case, massive 2022 failures like FTX demonstrated crypto has yet to endanger broader financial stability, per a think tank expert. Traditional banks with digital assets exposure faced liquidity issues, but no cascading effects emerged.
Actually, bringing a crypto company under Fed oversight would require lengthy FSOC approval most members have been loath to grant. Their initial designations mostly targeted insurers like AIG based on 2008 crisis links. All four companies first labeled systemic risks have since shed that status.
FSOC also failed to act ahead of recent banking troubles tied to digital assets despite regulators overseeing affected institutions. Congress and think tanks have highlighted this supervisory breakdown. Expanding authority over an industry whose risks remain unclear and isolated may undermine FSOC’s credibility.
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