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Financial oversight committee identifies potential risks in cryptocurrencies

Crypto reporter Jennifer Schonberger breaks down the Financial Stability Oversight Committee's report on cryptocurrencies, the risks it identified in digital assets, and the necessary regulation it suggested.

Video Transcript

[AUDIO LOGO]

- The Treasury Department's Financial Stability Oversight Council is issuing a new report saying cryptocurrencies could pose risks to the financial system without proper regulation and oversight. Yahoo Finance's Jen Schonberger has the details for us. Hey, Jen.

JENNIFER SCHONBERGER: Hey, good afternoon. That's exactly right. The Financial Stability Oversight Council warning in a brand new report that cryptocurrencies could pose risks to the financial system if they are allowed to grow in scale and connection to the traditional banking sector without proper oversight. Now, FSOC, which, of course, was created following the financial crisis to monitor threats to the financial system, says that potential drops in crypto prices, financial exposures between crypto firms, the risk of runs, and the use of leverage are all risks to the financial system.

The report says crypto prices appear to be primarily driven by speculation rather than grounded in current fundamental economics. Now, the council views stablecoins as the most pressing risk right now. And according to the report, many crypto asset activities lack basic rules to protect against the risk of runs or prevent high levels of leverage. It goes on to say that a lack of uniform regulations allow crypto firms to take advantage of gaps in the regulatory system.

The report also notes that while interconnections with the traditional banking system are currently limited, they could potentially increase rapidly, though overall, balance sheet exposure of banks to crypto remains limited. Now, to rein in these risks, FSOC recommends that Congress pass new legislation regulating the spot market for crypto. As well, they would like Congress to pass new legislation to regulate stablecoins. And they also want agencies to enforce existing rules to govern crypto and work together to fill regulatory gaps.

Now, FSOC just adjourning a meeting moments ago where they passed these regulations. This report coming at the direction of President Biden, who issued an executive order back in March ordering agencies across the government to study crypto and come up with ways to regulate them. Guys.

- All right. Jen Schonberger, thanks so much for that report.