A Backdoor Regulatory Option Haunts U.S. Crypto

After the 2008 global financial meltdown, Congress set up a round table of regulators who could wield a unique tool against the next emerging threats. The Financial Stability Oversight Council (FSOC) can tag companies with systemic-risk labels that saddle them with tremendous new restrictions, and the crypto sector has the council’s attention.

In November, the FSOC – a collection of the heads of the U.S. Department of the Treasury, Federal Reserve, Securities and Exchange Commission and other agencies – erased some key changes from the Trump era that had neutered the council’s power to designate companies as threats. It’s now back in full effect, even if the authority has long remained dormant.

At any time, the council could decide that one of the giants in the digital assets sphere – say, a stablecoin issuer such as Circle – could wound the wider financial system in the event of a failure, something akin to American International Group Inc.’s role in the mortgage collapse of 2008. When the FSOC affixes that tag on a business, it becomes a regulatory ward of the Fed, subjected to a number of compliance demands and supervision.

So far, there’s no sign such a move is coming, but the council has been warning of stablecoins’ emerging dangers to financial stability, and congressional Republicans finally brought this potentially into the public in a subcommittee hearing this month. As most of the digital assets industry was glued to news of the spotbitcoin exchangetraded funds (ETFs), lawmakers on the House Financial Services Committee asked pointed questions about exactly what the uber regulator has in mind for crypto.

Read more: US Risk Watchdog Asks Congress to Name Crypto Spot Market Regulator

“FSOC needs to tread very carefully when entertaining the idea of sidestepping Congress and congressional intent,” said the Rep. French Hill (R-Ark.), the chairman of the digital-assets subcommittee, who underlined the legislative work he and other lawmakers have been doing to shepherd crypto bills toward the House floor.

“We’ve crafted a regulatory framework for digital assets, and we’ve crafted a regulatory regime for stablecoins,” he said. “We don’t need FSOC to be involved in that. What they need to do is support our legislative effort.”

Warnings

The systemic-risk watchdog’s most recent…