GAO Report Calls for Federal Blockchain Legislation

The Government Accountability Office, in a recent report, called on Congress to pass federal blockchain regulation to account for gaps in the current regulatory system.

One problem is that while the Securities and Exchange Commission has been overseeing cryptocurrencies that operate as securities, the GAO noted that there is no federal financial regulator with the extensive authority to regulate the spot market for cryptoassets that are not securities. This is part of the broader problem that has been pointed out, which is that there is a veritable galaxy of crypto regulation from a wide variety of 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 all have their own regulations regarding cryptocurrencies and other digital assets.

Another, the GAO said, is the regulatory authority gaps surrounding stablecoins (crypto assets intended to maintain stable value against a fiat currency such as the US dollar). It noted that stablecoin issuers often state that their stablecoins are backed by reserve assets, but that no uniform standards exist for reserve levels and risks or for public disclosure of reserves, which increases the risk that a stablecoin cannot hold its value and honor users’ redemption requests.

The GAO also noted that there does not appear to be an adequate framework for dealing with DeFi products such as decentralized exchanges or lending platforms. While the current iterations are more centralized than the name suggests, allowing for regulatory action against them, the GAO noted that as time passes and these products become even more widespread, it becomes less clear how regulation will apply to DeFi products and, consequently, how regulators can address the risks posed by these products. These risks increase as DeFi products become more enmeshed in the cryptocurrency ecosystem and the global economy as a whole. The GAO noted that these risks likely span multiple jurisdictions at once.

With all this in mind, the GAO said Congress should pass legislation that will take these regulatory loopholes into account.

“Congress should consider legislation designating a federal regulatory agency to provide comprehensive regulatory oversight of spot markets for non-secured crypto-assets, including requirements designed to protect investors from fraud and market manipulation and promote market integrity. Congress should consider legislation providing for consistent and comprehensive oversight of stablecoin arrangements. Such legislation may include provisions determining eligibility of institutions to issue such stablecoins; establishing minimum requirements for reserve asset composition and requirements for regular auditing s of and public disclosures of reserve assets and audit results; establishment of prudential standards; and establishment of redemption rights,” the report concluded.

Meanwhile, the GAO has also recommended that regulators work with other regulators to establish or modify an existing formal coordination mechanism.

“We recognize that federal financial regulators, through various locations, have coordinated and identified unaddressed risks related to crypto-assets and, in some cases, responses to those risks. However, regulator coordination efforts to date have not always addressed crypto-asset risks in a timely manner. could reduce funding and threats to financial stability, and promote responsible innovation and U.S. competitiveness,” the report said.

Senate bill would create a framework

The GAO isn’t alone in calling for federal regulation: Senators Cynthia Lummis (R-WY), a member of the Senate Bench Committee, and Kirsten Gillibrand (D-NY), a member of the Senate Agriculture Committee, recently Lummis-Gillibrand Responsible Financial Innovation Act to create a comprehensive regulatory framework for crypto-assets. The bill has been greatly expanded compared to the previous version.

The proposed legislation covers many of the areas identified in the GAO report. If passed, it would:

• Mandatory disclosures on matters such as proof of reserves, standards and limits on loans;
• provide targeted guidance to federal agencies to curb the use of crypto assets
  in illegal financing and to support law enforcement;
• implement strict custody requirements, affiliate supervision, approval of change of control, segregation of duties, and mandatory record keeping, in addition to managing the risks and opportunities of decentralized finance;
• codify the existing Howey test, which is used to help determine whether or not something is a security;
• require all stablecoin payment issuers to be state or federal chartered
  depositories under this title, with mandatory federal oversight for state issuers;
• promote a government-wide approach to crypto assets and financial innovation to encourage coordination and collaboration among federal agencies; And
• more than $1.4 billion in new resources over five years
  federal agencies to implement these changes.

“I am proud to release this new, enhanced version of the two-part version Lummis-Gillibrand Responsible Financial Innovation Act with my friend and partner Senator Lummis,” said Senator Gillibrand. “Over the past year, we have worked with and with key stakeholders to improve our framework, adding strong new consumer protection and anti-money laundering provisions, providing additional resources to regulators so they can enforce new regulations, and creating clarity so companies can innovate responsibly. Congress has a duty to act to protect consumers and weed out bad actors, while also creating a transparent and accountable marketplace. Our framework does that, and we will make this bipartisan legislation a priority in this Congress.”