Blockchain technology records data and transactions in a shared, tamper-resistant, decentralized digital ledger and offers the promise of faster and cheaper financial transactions without middlemen.
Recent price crashes, bankruptcies and fraud involving blockchain-related products and services, such as crypto-assets, have raised concerns about how much regulation there is now and what risks consumers face. For example, there are gaps in federal regulation of stablecoins – a type of crypto asset – and crypto asset trading platforms, hurting consumers and investors.
The Government Accountability Office recommended that Congress consider legislation to address these risks.
Blockchain allows users to conduct and record fraud-resistant transactions performed by multiple parties without a central authority, such as a bank, when used for financial transactions. Because of these characteristics, blockchain-related products and services can provide cost savings, faster transactions, and other benefits over their traditional counterparts. However, these benefits have not been fully realised. In addition, the significant risks associated with these products have been realized and have negatively impacted consumers and investors. For example, crypto assets have faced price volatility. Also, the bankruptcy of FTX Trading Ltd., a prominent crypto asset trading platform, led to the discovery that a significant portion of the platform’s assets may have been missing or stolen, according to bankruptcy-related documents.
GAO discovered gaps in regulatory authority over two blockchain-related products raising concerns for consumer and investor protection and financial stability.
- No federal financial regulator has extensive authority to regulate the spot market for non-securities crypto assets. In contrast, platforms that trade crypto-asset securities and operate as exchanges as defined by federal securities laws are subject to registration and regulation as national stock exchanges unless an exemption applies. Several platforms without federal oversight have faced fraud and trading manipulation. By ensuring more extensive oversight of these platforms, Congress can better ensure users’ protection against unfair and manipulative business practices.
- There are regulatory authority gaps in overseeing stablecoins (a crypto asset purported to have stable value against a fiat currency, such as the US dollar). To maintain their value, issuers often specify that their stablecoins are backed by reserves. But there are no uniform standards for reserve levels and risks or for reserve disclosure. This increases the risk that a stablecoin cannot hold its value and honor users’ redemption requests. As these stablecoins become more integrated into the financial system, their failures could pose a risk to financial stability. By ensuring consistent and comprehensive oversight of stablecoins, Congress can better ensure the protection of consumers, investors and the financial system.
Regulators lack an ongoing coordination mechanism to address blockchain risks in a timely manner. For example, regulators identified the financial stability risks of stablecoins in 2019, but they did not identify the need for Congressional action to address the risks until November 2021 (in a report released by the President’s Working Group on Financial Markets). A formal coordination mechanism for addressing blockchain-related risks, which could establish processes or timelines for responding to risks, could help federal financial regulators collectively identify risks and develop timely and appropriate responses. This, in turn, could improve consumer and investor protection, reduce illicit financing and threats to financial stability, and promote responsible innovation and US competitiveness.
GAO recommends that Congress consider legislation for federal oversight of unsecured spot markets for cryptoassets and stablecoins. GAO also makes seven recommendations (one for each of the seven financial regulators) to establish a coordination mechanism (or modify an existing one) to identify and address blockchain-related risks. One supervisor agreed with the recommendation and the others disagreed or disagreed.
Read the GAO report