Treasury report finds cryptocurrencies could undermine U.S. financial stability

A report released Monday by the Treasury Department found that prices of government-backed cryptocurrencies are mostly set by market speculation and don’t have much economic reality underpinning them. As such, they could threaten the stability of the U.S. financial system if they become too entwined with the mainstream financial system, the report warned.

“Crypto-asset prices appear to be primarily driven by speculation rather than grounded in current fundamental economic use cases, and prices have repeatedly recorded significant and broad declines. Many crypto-asset firms or activities have sizable interconnections with crypto-asset entities that have risky business profiles and opaque capital and liquidity positions,” the report from the Treasury found.

“Crypto-asset activities could pose risks to the stability of the U.S. financial system if their interconnections with the traditional financial system or their overall scale were to grow without adherence to or being paired with appropriate regulation, including enforcement of the existing regulatory structure,” the report said.

The report from the Financial Stability Oversight Council (FSOC) cautioned that since 2017, when a regulatory committee was set up to work on issues relating to crypto trading, market speculation on digital assets has skyrocketed, leading to “an important emerging vulnerability.”

Bitcoin, one of the most well-known cryptocurrencies, has swung wildly since the start of the pandemic in 2020 and has lost nearly 60 percent of its value since the start of the year. Other cryptocurrencies have seen similar turbulence in their prices.

Some cryptocurrency advocates have pointed to government-backed digital assets, known as stablecoins, as an alternative to untethered currencies, which they say are less volatile and more legitimate.

But the report from Treasury calls out stablecoins as a potential weak spot where highly speculative digital assets could threaten the traditional financial system.

“Although interconnections with the traditional financial system are currently relatively limited, they could potentially increase rapidly. Participants in the crypto-asset ecosystem and the traditional financial system have explored or created a variety of interconnections. Notable sources of potential interconnections include traditional assets held as part of stablecoin activities,” the report said.

In August, a bipartisan bill to regulate the cryptocurrency space was introduced that would require traders to register with the U.S. government’s Commodity Futures Trading Commission (CFTC), an independent agency that regulates derivatives markets.

The bill would also require digital commodity platforms to eliminate or disclose conflicts of interest, maintain capital resources, have strong cybersecurity programs and to report suspicious transactions.

“Relying solely on state regulation does not ensure that rules and regulations work for all stakeholders. Our bill will empower the CFTC with exclusive jurisdiction over the digital commodities spot market, which will lead to more safeguards for consumers, market integrity and innovation in the digital commodities space,” bill sponsor Sen. John Boozman (R-Ark.) said in a statement released along with the bill.

Sen. Debbie Stabenow (D-Mich.), another sponsor of the legislation, said cryptocurrency markets lack transparency and accountability.

“We are closing regulatory gaps and requiring that these markets operate under straightforward rules that protect customers and keep our financial system safe,” she said in an August statement.

The report from Treasury doesn’t endorse any particular piece of legislation, but a Treasury Department official said the department is “heartened by the bipartisan engagement.”