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Digital Assets: Financial Stability Oversight Council Risk Report Assesses Regulatory Gaps; Offers Recommendations

On Oct. 3, the Financial Stability Oversight Council (FSOC) took another step in identifying, assessing, and responding to the risks various types of digital assets pose to the financial system by releasing its Report on Digital Asset Financial Stability Risks and Regulation (Report) in response to President Biden’s March 2022 Executive Order on “Ensuring Responsible Development of Digital Assets.”

The Report reviews the specific financial stability risks and regulatory gaps digital assets pose and provides recommendations to address such risks. This GT Alert summarizes the Report.

Financial stability risks have amplified within the crypto-asset ecosystem largely due to participants’ failure to implement appropriate risk controls and create effective governance.

  • Some crypto-asset activities lack basic risk controls to protect against run risk or to help ensure leverage is not excessive.

  • Crypto-asset prices primarily appear driven by speculation rather than grounded in current fundamental economic use cases, and prices have recorded significant and broad declines.

  • Some crypto-asset firms or activities have sizable interconnections with crypto-asset entities with risky business profiles and opaque capital and liquidity positions.

  • In addition, despite the distributed nature of crypto-asset systems, operational risks may arise from the concentration of key services or from vulnerabilities related to distributed ledger technology.

Regulatory gaps were observed and discussed at length. They include:

  • Limited direct federal regulation of spot markets1 for crypto-assets that are not securities results in weaker rules.

  • Inconsistent or incomprehensive regulatory frameworks that allow for regulatory arbitrage.

Some crypto-asset trading platforms have proposed offering retail customers direct access to markets by vertically integrating the services provided by intermediaries. Financial stability and investor protection implications may arise from retail investors’ exposure to certain practices commonly proposed by vertically integrated trading platforms, such as automated liquidation. The FSOC made recommendations that include:

  • passage of legislation providing for rulemaking authority for federal financial regulators over the spot market for crypto-assets that are not securities;

  • steps to address regulatory arbitrage including coordination, legislation regarding risks stablecoins pose, legislation relating to regulators’ authorities to have visibility into, and otherwise supervise, the activities of all affiliates and subsidiaries of crypto-asset entities, and appropriate service provider regulation; and

  • study of potential vertical integration by crypto-asset firms.

Finally, the Report highlights the existence of a regulatory framework that is effective when enforced but sometimes obfuscated by firms. The Report suggests that compliance with and enforcement of existing regulations is the key to addressing financial stability risks. The Report may help guide lawmakers in crafting legislation that addresses the concerns raised therein, specifically around regulatory arbitrage, spot markets, and implementation of appropriate risk controls by vertically integrated crypto-asset firms.


1 The spot market is where financial instruments, such as commodities, currencies, and securities, are traded for immediate delivery.

©2023 Greenberg Traurig, LLP. All rights reserved. National Law Review, Volume XII, Number 290

About this Author

Barbara Jones, Greenberg Traurig Law Firm, Los Angeles, Private Equity, Corporate and Energy Law Attorney

Barbara A. Jones is a member of the firm’s Global Securities practice group and co-chairs the firm's Blockchain Task Force. She is also co-coordinator of the firm’s interdisciplinary Conflict Minerals Compliance Initiative. Barbara maintains a diverse corporate and securities law practice across industry groups, emphasizing complex international and domestic transactions, including blockchain/cryptocurrency transactions, private and public financings (including ICOs), dual listings, mergers and acquisitions, strategic collaborations and joint ventures, and licensing...

William B. Mack, Greenberg Traurig Law Firm, New York, Finance Law Attorney

William B. Mack is part of the firm’s government affairs and financial regulatory and compliance groups. He is experienced in advising companies on regulatory and compliance matters relating to the Securities and Exchange Commission regulations, the Exchange Act, Anti-Money Laundering laws and Financial Industry Regulatory Authority (FINRA) rules.

William’s practice involves all aspects of broker-dealer regulation, including Self-Regulatory Organization (SRO) membership, supervision, employment, research, soft dollar arrangements, chaperoning of...

India L. Sneed Associate Government Law & Policy

Having worked in New York City government in various capacities, India Sneed has an intimate understanding of how to navigate the complexities of local government. India focuses her practice on administrative law and government affairs, as well as economic development and financing initiatives before government agencies.

India served as Chief of Staff to the 41st District Councilmember where she oversaw the legislative, budget, and community engagement priorities led by the Councilmember. Prior to that, she was Assistant District Attorney for Kings County where she prosecuted...