Senator Elizabeth Warren (D-MA) urged the Financial Stability Oversight Council ("FSOC") to address risks to the U.S. financial system arising from cryptocurrencies.
In a letter to Treasury Secretary and FSOC Chair Janet Yellin, Senator Warren emphasized the extent to which the U.S. financial system has become exposed to risks posed by digital assets, noting that instability in the cryptocurrency market can spread throughout the financial sector. She outlined key areas of risk including:
- increased exposure of hedge funds to blockchain technologies and cryptocurrency, coupled with the lack of uniform data reporting requirements, that makes it difficult for regulators and banks to know the extent of such risk;
- the volatility of some cryptocurrencies, which poses liquidity, credit, market and operational risks to banks, particularly if cryptocurrency companies are able to obtain banking charters without being held to the same safety and soundness requirements to which traditional banks are subject;
- unique threats presented by stablecoins due to the interconnectedness of a potential global stablecoin network, in which an unregulated and inadequately designed stablecoin could pose severe risks to domestic or international financial stability if too many holders try to simultaneously liquidate their stablecoins;
- the attractiveness of cryptocurrencies to hackers, considering the lack of regulation and the difficulty associated with tracing crypto payments; and
- the novel forms of concentration risks, ambiguous liability allocations, and challenges to recovery and resolution posed by decentralized finance.
Senator Warren recommended that FSOC address these risks under Section 120 of Dodd-Frank, which enables the FSOC to provide recommendations to the primary financial regulatory agencies for activities that can create or substantially increase the spread of liquidity, credit or other risks among bank holding companies and nonbank financial companies.
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