Crypto Could Undermine US Financial Stability, Treasury Report Finds

The prices of government-backed cryptocurrencies, which are mostly driven by market speculation and don’t have much economic reality supporting them, could threaten the US financial system’s stability if they become too entwined with the mainstream financial system, a report released by the Treasury Department on Monday showed.

The stability of the US financial system could be threatened by the interconnections of crypto-asset activities – many of which have sizable interconnections with crypto-asset entities with risky business profiles and opaque capital and liquidity positions – with the traditional financial system if those interconnections were to grow without adherence to appropriate regulation, including enforcement of the existing regulatory structure.

According to the Financial Stability Oversight Council’s (FSOC) report, market speculation on digital assets has skyrocketed – leading to an important emerging vulnerability- since 2017 when a regulatory committee was set up to deal with crypto trading-related issues.

Swinging wildly since the start of the 2020 pandemic, one of the most well-known cryptocurrencies, Bitcoin, has lost nearly 60% of its value since the start of the year with other cryptocurrencies seeing similar turbulence in their prices.

Emphasizing that they’re less volatile and more legitimate, some cryptocurrency advocates suggested government-backed digital assets – known as stablecoins – as an alternative to untethered currencies but the report brands them ‘highly speculative digital assets and potential weak spot’ that could threaten the traditional financial system.

The report from Treasury said that although they are currently relatively limited, interconnections with the traditional financial system could potentially increase rapidly pointing out that traditional assets held as part of stablecoin activities are notable sources of potential interconnections.

GOP Sen. John Boozman introduced in August a bipartisan bill to regulate the cryptocurrency space that would empower the US government’s Commodity Futures Trading Commission (CFTC) with exclusive jurisdiction over the digital commodities spot market.

That would lead to market integrity, more safeguards for consumers, and innovation in the digital commodities space since traders would be required to register with CFTC, the independent agency that regulates derivatives markets.

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