- The Financial Stability Oversight Council (FSOC) could designate crypto companies as systemic risks, leading to stringent regulations.
- Congressional Republicans express concerns over FSOC’s involvement in crypto regulation, emphasizing the importance of legislative efforts.
The FSOC’s Potential Influence on Crypto Regulation
In the wake of the 2008 global financial crisis, Congress established the Financial Stability Oversight Council (FSOC), a consortium of regulatory agency heads capable of applying unique tools to combat emerging financial threats. One such tool is the ability to label companies as systemic risks, subjecting them to extensive new regulations. The crypto sector has recently garnered the FSOC’s attention, raising concerns within the industry.
In November, the FSOC, consisting of leaders from the U.S. Department of the Treasury, Federal Reserve, Securities and Exchange Commission, and other agencies, reinstated certain changes that had limited the council’s authority to designate companies as threats during the Trump era. This authority has now been fully restored, despite having remained dormant for some time.
At any moment, the FSOC could determine that a major player in the digital asset space, like a stablecoin issuer such as Circle, poses a risk to the broader financial system in the event of a failure, similar to the role played by American International Group Inc. in the 2008 mortgage collapse. When the FSOC assigns this label to a company, it falls under the regulatory purview of the Federal Reserve, subject to various compliance requirements and supervision.
Congressional Concerns and FSOC Warnings
While there is currently no indication of such action being taken, the FSOC has been sounding the alarm about the potential dangers stablecoins pose to financial stability. In a recent subcommittee hearing, congressional Republicans raised questions about the FSOC’s intentions regarding crypto, diverting attention from the news of spot bitcoin exchange-traded funds (ETFs).
Rep. French Hill (R-Ark.), the chairman of the digital-assets subcommittee, emphasized the importance of legislative efforts in crafting regulatory frameworks for digital assets and stablecoins. He cautioned against the FSOC bypassing Congress and its intended role in regulating the crypto sector.
The FSOC’s most recent warning about virtual assets came in its annual report, highlighting crypto’s potential risks to U.S. finance. While appearing supportive of lawmakers’ goals for crypto regulation, the report also served as a warning, suggesting that if comprehensive legislation is not enacted soon, the FSOC may take action.
Assessment of FSOC’s Potential Actions
Despite these warnings, Ji Kim, the general counsel and head of global policy for the Crypto Council for Innovation, believes it is unlikely that the FSOC will utilize this tool. He notes that FSOC designation is intentionally reserved for risks of significant magnitude, and the current state of the crypto sector does not meet this criteria.
Bill Hulse, senior vice president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, suggests that the FSOC may be using potential risk designations as leverage to influence the crafting of crypto-related bills. However, he argues that the events of 2022, including industry failures like the collapse of FTX, demonstrate that the crypto sector does not pose a significant threat to the broader financial system.
While the FSOC has the authority, its track record and consensus-based decision-making process make it a slow-moving entity. It remains to be seen whether it will take action against a crypto company, as it has never employed this approach outside of the 2008 crisis context. Designating a crypto firm as a systemic risk could also invite scrutiny regarding the council’s approach to other financial giants in the U.S. asset management industry.