US GAO says lack of inter-agency cooperation needs to be addressed in crypto regulation

That’s what the US Government Accountability Office (GAO), the congressional watchdog agency, did. Issued A report was completed in June on the regulatory framework for the use of blockchain in finance.

The 77-page report was requested by Representatives Maxine Waters and Stephen Lynch ahead of the midterm elections, when they were chair and senior member, respectively, of the House of Representatives’ Financial Services Committee. Unsurprisingly, the report calls for more regulation. The agency has a framework for evaluating regulatory reform proposals that was developed in 2009.

The report pointed to crypto asset trading platforms and stablecoins as products that lack regulation, but it examined the policies and activities of regulators without delving into “turf war” disputes related to defining securities. For example, it identified spot markets for non-secured crypto assets as the focus of the regulatory gap, saying:

“By appointing a federal regulator to provide comprehensive federal oversight of spot markets for unsecured crypto assets, Congress can reduce financial stability risks and better ensure that users of platforms are protected.”

The report noted that traditional assets in that category enjoy stronger regulation. Crypto-assets are subject to limited oversight, such as through the Treasury’s Financial Crimes Enforcement Network and state money-transmitting licenses.

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Stable coins require regulations regarding the composition of their reserves, audit and disclosure, and redemption rights. The report notes that the existing rules are a mix of measures taken by the Securities and Exchange Commission, the Commodity Futures Trading Commission and add that it does not amount to “coherent and comprehensive prudential regulation and supervision”.

Decentralized finance can be regulated in inverse relation to the level of decentralization, the GAO said. When an ecosystem is completely decentralized, there is no one person who can be identified as responsible for its development, operation, or governance. Its operations may also involve multiple regulatory jurisdictions.

Turning to issues of contention, the report identified the need for greater coordination between regulators and noted complaints from market participants about regulators’ slow response to innovations in the market. The report states that the Treasury’s Financial Stability Oversight Council was tasked with leading the effort to create a unified approach to crypto asset oversight through a March 2022 Executive Order on Ensuring the Responsible Development of Digital Assets.

The report recommended that the seven relevant regulatory agencies “jointly establish or modify existing formal coordination mechanisms […] To collectively identify risks to blockchain-related products and services and prepare for a timely regulatory response.”

“This mechanism could include formal planning documents that define the frequency of meetings and procedures for identifying risks and responding to them within agreed time frames.”

The National Credit Union Administration agreed with that conclusion, while others disagreed or disagreed. The GAO is the nation’s highest ranking auditor. Although the recommendations are not legally binding, the century-old agency’s findings carry significant ethical significance.

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