The US Government Accountability Office (GAO), a congressional oversight agency, has released a report it completed in June on the regulatory framework for the use of blockchain in finance.
The 77-page report was requested by Representatives Maxine Waters and Stephen Lynch before the midterm elections, when they were respectively chair and ranking member of the House Financial Services Committee. The report unsurprisingly found that more regulation is needed. The agency has a framework for assessing regulatory reform proposals developed in 2009.
The report highlighted crypto-asset trading platforms and stablecoins as products devoid of regulation, but it examined the policies and activities of regulators without straying into “turf wars” controversies related to the definition of securities. Thus, he identified spot markets for unsecured crypto assets as the center of a regulatory gap and said:
“By designating a federal regulator to provide comprehensive federal oversight of spot markets for unsecured crypto assets, Congress could mitigate financial stability risks and better ensure platform users receive protections.”
Traditional assets in this category benefit from strong regulation, the report notes. Crypto assets are subject to limited oversight, such as that of the Treasury’s Financial Crimes Enforcement Network (FinCEN) and through state money transfer licenses.
Related: US Congressional Agency Recommends 4 Key Blockchain Policy Options
Stablecoins need regulation regarding the composition of their reserves, auditing and disclosures, and redemption rights. The report says current regulations are a hodgepodge of actions from the Securities and Exchange Commission, Commodity Futures Trading Commission and states that do not constitute “coherent and comprehensive prudential regulation and supervision.”
DeFi is capable of being regulated in inverse relationship to the level of its decentralization, the GAO said. When an ecosystem is fully decentralized, no individual can be identified as responsible for its development, operation or governance. It can also cover several regulatory jurisdictions in its operations.
Blockchain technology, like #cryptocurrency— could offer faster and cheaper financial transactions. But recent price crashes and bankruptcies have raised concerns about loopholes in federal regulations that could put consumers at risk. Our new report and video explore: pic.twitter.com/nxHrk1g5dQ
— USGAO (@USGAO) July 24, 2023
Moving closer to turf war issues, the report identified the need for greater coordination among regulators and noted market participants’ complaints about regulators’ slow response to innovations in the market. The report notes that the Treasury’s Financial Stability Oversight Board was tasked with leading an effort to create a unified approach to oversight of crypto assets by the March 2022 Executive Order on Ensuring Responsible Development of Digital Assets.
The report recommended that the seven relevant regulatory agencies “jointly establish or adapt an existing formal coordination mechanism (…) to collectively identify the risks posed by blockchain-related products and services and formulate a timely regulatory response.” Besides:
“This mechanism could include formal planning documents that establish frequency of meetings and processes to identify and respond to risks within agreed timeframes.”
The National Credit Union Administration agreed with this finding, while the others either disagreed or disagreed. The GAO is the nation’s highest auditor. Although its recommendations are not legally binding, the findings of the century-old agency carry considerable moral weight.
Magazine: Crypto Regulation: Does SEC Chairman Gary Gensler Have the Final Word?
