After the global financial collapse of 2008, Congress created a roundtable of regulators who could use a unique tool against emerging threats to come. The Financial Stability Oversight Council (FSOC) can label companies with systemic risk ratings that burden them with massive new restrictions, and the cryptocurrency sector is getting the FSOC's attention.
In November, the Financial Stability Oversight Council – a group of the heads of the US Treasury, the Federal Reserve, the Securities and Exchange Commission and other agencies – cleared some key changes from the Trump era that had neutralized the board’s power to designate companies as threats. It is now back in full force, even if the power has remained dormant for a long time.
At any time, the board could decide that one of the giants in the digital assets space — for example, a stablecoin issuer like Circle — could harm the broader financial system if it fails, something American International Group Inc. is akin to. It was the Fed's role in the subprime mortgage collapse of 2008. When the Financial Stability Oversight Committee puts that label on a company, it becomes a regulatory wing of the Fed, and is subject to a number of compliance and oversight requirements.
So far, there's no sign that such a move is coming, but the council has been warning of the emerging risks of stablecoins to financial stability, and Republicans in Congress finally brought this potential to the public in a subcommittee hearing this month. As most of the digital asset industry has been glued to the news of bitcoin exchange-traded funds (ETFs), lawmakers on the House Financial Services Committee have asked pointed questions about what exactly Uber's regulator has in mind regarding cryptocurrencies.
“The Financial Stability Oversight Council (FSOC) needs to tread very carefully when considering the idea of congressional overreach and the intentions of Congress.” It was done to direct cryptocurrency bills toward the House floor.
“We have formulated a regulatory framework for digital assets, and we have formulated a regulatory system for stablecoins,” he said. “We don't need the Financial Stability Oversight Council to be involved in this. What they need to do is support our legislative efforts.”
The most recent mention of virtual assets by the systemic risk watchdog came in its annual report last month, which once again highlighted cryptocurrencies as a potential emerging risk to the health of US finance. Regulators are particularly concerned about stablecoins, tokens identical to the value of fixed assets such as the US dollar, which are generally used as a way to buy and sell volatile digital assets. On the surface, the council's calls to legislate cryptocurrencies appear supportive of lawmakers' goals. But the report again added a warning. “The Council remains prepared to consider steps available to it to address risks related to stablecoins in the event that comprehensive legislation is not enacted,” he said. Basically: If you don't act soon, we might.
Despite the warning, one of those who testified at the hearing, Ji Kim, general counsel and head of global policy for the Cryptocurrency Innovation Council, told CoinDesk that it is still unlikely that the FSOC will use this tool.
“It would certainly be surprising if that happened, given that the FSOC rating is intentionally a very high ceiling, which means risks of significant magnitude,” he said. Council members emphasized that the current cryptocurrency sector “does not rise to the level of systemic risk.”
Bill Hulse, senior vice president of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, suggested during the hearing that the chamber might threaten Congress with potential risk designations as leverage to get into how bills are written. But he stressed that 2022 — with its massive industry failures that included the FTX collapse — showed precisely that there was no reason the cryptocurrency sector could significantly shake up the rest of the country's financial plumbing.
“None of these failures — including instances of fraud and other violations of consumer trust — had a material impact on the ‘traditional financial system,’” he testified.
The Financial Stability Oversight Council has a spotty record and is notoriously slow, because a long list of agency heads with very different interests must agree on the board's actions. Initially, it contracted with several major insurance companies, including American International Group (AIG), but the four companies it initially identified have since exited. In the intervening years, it has focused largely on its annual report citing ongoing concerns.
The lawmakers and Paul Kubiak, a senior fellow at the American Enterprise Institute, noted at the hearing that the group of regulators recently failed to avert one of the most serious financial crises since the subprime mortgage collapse. And when institutions like Silvergate Bank and Signature Bank began to decline — partly due to reliance on the cryptocurrency industry's deposits — the board did nothing to prevent it.
Kubiak noted that federal banking agencies whose heads serve on the Financial Stability Oversight Committee “have failed in their efforts to supervise banks that have significant business relationships with the digital assets industry.” “They did not use their rapid remedial powers to mitigate risks arising from banks’ investment decisions and digital trading relationships.”
To bring a cryptocurrency company under Fed supervision, the board would have to go through a long, multi-stage process that has never been used for any companies other than those involved in risks during the 2008 crisis. Classifying a cryptocurrency company as risky could open the board to… Questions about why a giant US asset management company was not targeted.
For now, Republican lawmakers appear to be putting out their own warning that the administration will listen to them again if the Financial Stability Oversight Committee goes that route.
