The Government Accountability Office, in a recent report, urged Congress to adopt federal blockchain regulation to address gaps in the current regulatory system.
One issue is that while the Securities and Exchange Commission oversees cryptocurrencies that act as securities, the GAO noted that there is no federal financial regulator with comprehensive authority to regulate the spot market for crypto assets that are not securities. This is part of the broader problem mentioned, namely that there is a veritable galaxy of crypto regulations from different regulators: not just the SEC, but also the Commodity Futures Trading Commission, the Financial Crimes Enforcement Network, the Consumer Financial Protection Bureau, and the Federal Reserve System, all of which have their own digital and other crypto regulations.
Another, the GAO said, is loopholes in the regulatory framework surrounding stablecoins (crypto assets meant to maintain a stable value compared to fiat currencies such as the U.S. dollar). He noted that stablecoin issuers often claim that their stablecoins are backed by reserve assets, but there are no uniform standards for reserve levels and risks or public disclosure of reserves, which increases the risk that the stablecoin will not be able to maintain its value and honor user redemption requests.
The GAO also noted that there is no adequate framework to deal with DeFi products such as decentralized exchanges or lending platforms. While current iterations are more centralized than the name implies, allowing for regulatory action against them, the GAO noted that as time passes and these products become more fragmented, it becomes less clear how regulations apply when DeFi products and, therefore, how regulators can address the risks of these products. These risks increase as DeFi products become more involved in the cryptocurrency ecosystem and the global economy as a whole. GAO noted that these risks are likely to span multiple jurisdictions at the same time.
All in all, the GAO said Congress should pass legislation that addresses these regulatory gaps.
Congress should consider legislation that would appoint a federal regulator to provide comprehensive regulatory oversight of spot markets for unsecured crypto assets. Establishes and requires regular audits and public disclosure of reserve assets and audit results, establishing reasonable standards and establishing redemption rights,” the report concludes.
Meanwhile, the GAO also recommended that regulators jointly establish or modify existing formal coordination mechanisms with other regulators.
“We recognize that federal financial regulators have coordinated across agencies and identified unwarranted risks associated with cryptoassets and, in some cases, responded to those risks. However, regulatory coordination efforts have not always addressed the risks posed by cryptoassets in a timely manner. Regulatory responses can improve consumer and investor protection, mitigate illicit finance and financial stability threats, and promote accountability.” e-innovation and US competitiveness,” the report said.