Blockchain in Finance: Legislative and Regulatory Actions Are Needed to Ensure Comprehensive Oversight of Crypto Assets
Fast Facts
Blockchain technology records data and transactions in a shared, tamper-resistant, decentralized digital ledger—offering the promise of faster and cheaper financial transactions with no middlemen.
Recent price crashes, bankruptcies, and fraud involving blockchain-related products and services, such as crypto assets, raised concerns about how much regulation exists now and the risks consumers face. For example, there are gaps in federal regulation of stablecoins—a kind of crypto asset—and trading platforms for crypto assets, leaving consumers and investors subject to harm.
We recommended that Congress consider legislation to address these risks.
Highlights
What GAO Found
Blockchain allows users to conduct and record tamper-resistant transactions that multiple parties make without a central authority, such as a bank, when used for financial transactions. Because of these characteristics, blockchain-related products and services have the potential to produce cost savings, faster transactions, and other benefits over their traditional counterparts. However, these benefits have not been fully realized. Furthermore, the significant risks these products pose have been realized and negatively affected consumers and investors. For example, crypto assets have experienced price volatility. Also, the bankruptcy of FTX Trading Ltd., a prominent crypto asset trading platform, led to the discovery that a substantial portion of the platform's assets might be missing or stolen, according to bankruptcy-related documents.
GAO found gaps in regulatory authority over two blockchain-related products that raise consumer and investor protection and financial stability concerns.
- No federal financial regulator has comprehensive authority to regulate the spot market for crypto assets that are not securities. 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 securities exchanges, unless an exemption applies. Several platforms without federal oversight have experienced fraud and trading manipulation. By providing for more comprehensive oversight of these platforms, Congress could better ensure users' protection from unfair and manipulative trading practices.
- Gaps in regulatory authority exist in the oversight of stablecoins (a crypto asset purported to hold a stable value relative to a fiat currency, such as the U.S. dollar). To keep their value, issuers often state their stablecoins are backed by reserve assets. But no uniform standards exist for reserve levels and risks or for public disclosure of reserves. This increases the risk that a stablecoin may not be able to hold its value and honor user redemption requests. To the extent these stablecoins become more integrated into the financial system, their failures could pose risks to financial stability. By providing for consistent and comprehensive oversight of stablecoins, Congress could better ensure protections for consumers, investors, and the financial system.
Regulators lack an ongoing coordination mechanism for addressing blockchain risks in a timely manner. For example, regulators identified financial stability risks posed by stablecoins in 2019, but they did not identify the need for Congressional action to address the risks until November 2021 (in a report issued through the President's Working Group on Financial Markets). A formal coordination mechanism for addressing blockchain-related risks, which could establish processes or time frames for responding to risks, could help federal financial regulators collectively identify risks and develop timely and appropriate responses. In turn, this could improve protections for consumers and investors, mitigate illicit finance and threats to financial stability, and promote responsible innovation and U.S. competitiveness.
Why GAO Did This Study
Blockchain-related financial products and services have grown substantially in recent years. For example, crypto assets reached a peak market capitalization of nearly $3 trillion in November 2021. However, recent volatility, bankruptcies, and instances of fraud in these markets illustrate the harm consumers and investors may face without adequate protections. Regulators and industry stakeholders are concerned regulatory gaps may limit regulators' ability to address risks these products and services pose. Modernizing the financial regulatory system is on GAO's high-risk list, partly because some entities are not subject to comprehensive regulation.
GAO was asked to study the regulation of blockchain-related financial products and services. Among other objectives, this report examines regulatory gaps and coordination in regulating these applications. GAO reviewed and analyzed government and industry reports, government guidance and speeches, and laws and regulations. GAO interviewed agency officials and market participants and observers.
Recommendations
GAO recommends Congress consider legislation for federal oversight of nonsecurity crypto asset spot markets and stablecoins. GAO is also making seven recommendations (one to each of seven financial regulators) to establish a (or adapt an existing) coordination mechanism to identify and address blockchain-related risks. One regulator agreed with the recommendation and the others neither agreed nor disagreed.
Matter for Congressional Consideration
| Matter | Status | Comments |
|---|---|---|
| Congress should consider legislation that designates a federal regulator to provide for comprehensive regulatory oversight of spot markets for nonsecurity crypto assets, including requirements intended to protect investors from fraud and market manipulation and to promote market integrity. (Matter for Consideration 1) | GAO is monitoring actions on this recommendation to Congress. As of March 2024, H.R 4763, the Financial Innovation and Technology for the 21st Century Act; S. 2281, the Secure and Fair Employment in Federal Contracting Act; and H.R. 5745, the Digital Asset Market Structure and Investor Protection Act were introduced. No action has been taken since introduction. | |
| Congress should consider legislation providing for consistent and comprehensive oversight of stablecoin arrangements. Such legislation might include provisions identifying which institutions are eligible to issue such stablecoins; establishing minimum requirements for the composition of reserve assets and requirements for regular audits of and public disclosures of reserve assets and audit results; establishing prudential standards; and establishing redemption rights. (Matter for Consideration 2) | GAO is monitoring actions on this recommendation to Congress. As of March 2024, H.R. 4766, the Clarity for Payment Stablecoins Act of 2023; S. 2281, the Secure and Fair Employment in Federal Contracting Act; and H.R. 5745, the Digital Asset Market Structure and Investor Protection Act were introduced. No action has been taken since introduction. |
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Consumer Financial Protection Bureau | 1. The Director of the Consumer Financial Protection Bureau should jointly establish or adapt an existing formal coordination mechanism with CFTC, FDIC, the Federal Reserve, NCUA, OCC, and SEC for collectively identifying risks posed by blockchain-related products and services and formulating a timely regulatory response. To facilitate these objectives, this mechanism could include formal planning documents that establish the frequency of meetings and processes for identifying risks and responding to them within agreed-upon time frames. (Recommendation 1) |
When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
|
| Commodity Futures Trading Commission | 2. The Chairman of the Commodity Futures Trading Commission should jointly establish or adapt an existing formal coordination mechanism with CFPB, FDIC, the Federal Reserve, NCUA, OCC, and SEC for collectively identifying risks posed by blockchain-related products and services and formulating a timely regulatory response. To facilitate these objectives, this mechanism could include formal planning documents that establish the frequency of meetings and processes for identifying risks and responding to them within agreed-upon time frames. (Recommendation 2) |
When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
|
| Federal Deposit Insurance Corporation |
Priority Rec.
3.
The Chairman of the Federal Deposit Insurance Corporation should jointly establish or adapt an existing formal coordination mechanism with CFPB, CFTC, the Federal Reserve, NCUA, OCC, and SEC for collectively identifying risks posed by blockchain-related products and services and formulating a timely regulatory response. To facilitate these objectives, this mechanism could include formal planning documents that establish the frequency of meetings and processes for identifying risks and responding to them within agreed-upon time frames. (Recommendation 3) |
FDIC neither agreed nor disagreed with the recommendation. In addition, FDIC noted it has coordinated through venues including the Financial Stability Oversight Council, the President's Working Group, and some international organizations. However, the regulators' coordination efforts have not always addressed risks posed by crypto assets in a timely manner. We maintain that a formal coordination mechanism focused on collectively identifying risks posed by blockchain-related products and services and formulating timely regulatory responses could improve protections for consumers and investors, mitigate illicit finance and threats to financial stability, and promote responsible innovation and U.S. competitiveness.
|
| Federal Reserve System |
Priority Rec.
4.
The Chair of the Board of Governors of the Federal Reserve System should jointly establish or adapt an existing formal coordination mechanism with CFPB, CFTC, FDIC, NCUA, OCC, and SEC for collectively identifying risks posed by blockchain-related products and services and formulating a timely regulatory response. To facilitate these objectives, this mechanism could include formal planning documents that establish the frequency of meetings and processes for identifying risks and responding to them within agreed-upon time frames. (Recommendation 4) |
The Federal Reserve neither agreed nor disagreed with the recommendation. In its agency comment letter, the Federal Reserve said it routinely engages with the other federal financial regulators on emerging risks posed by blockchain-related products and services. However, the regulators' coordination efforts have not always addressed risks posed by crypto assets in a timely manner. We maintain that a formal coordination mechanism focused on collectively identifying risks posed by blockchain-related products and services and formulating timely regulatory responses could improve protections for consumers and investors, mitigate illicit finance and threats to financial stability, and promote responsible innovation and U.S. competitiveness.
|
| National Credit Union Administration | 5. The Chairman of the National Credit Union Administration should jointly establish or adapt an existing formal coordination mechanism with CFPB, CFTC, FDIC, the Federal Reserve, OCC, and SEC for collectively identifying risks posed by blockchain-related products and services and formulating a timely regulatory response. To facilitate these objectives, this mechanism could include formal planning documents that establish the frequency of meetings and processes for identifying risks and responding to them within agreed-upon time frames. (Recommendation 5) |
When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
|
| Office of the Comptroller of the Currency |
Priority Rec.
6.
The Comptroller of the Currency should jointly establish or adapt an existing formal coordination mechanism with CFPB, CFTC, FDIC, the Federal Reserve, NCUA, and SEC for collectively identifying risks posed by blockchain-related products and services and formulating a timely regulatory response. To facilitate these objectives, this mechanism could include formal planning documents that establish the frequency of meetings and processes for identifying risks and responding to them within agreed-upon time frames. (Recommendation 6) |
OCC neither agreed nor disagreed with the recommendation. In its agency comment letter, OCC said it continues to monitor, separately and in collaboration with the other federal financial regulators on emerging risks posed by blockchain-related products and services. However, the regulators' coordination efforts have not always addressed risks posed by crypto assets in a timely manner. We maintain that a formal coordination mechanism focused on collectively identifying risks posed by blockchain-related products and services and formulating timely regulatory responses could improve protections for consumers and investors, mitigate illicit finance and threats to financial stability, and promote responsible innovation and U.S. competitiveness.
|
| United States Securities and Exchange Commission |
Priority Rec.
7.
The Chairman of the Securities and Exchange Commission should jointly establish or adapt an existing formal coordination mechanism with CFPB, CFTC, FDIC, the Federal Reserve, NCUA, and OCC for collectively identifying risks posed by blockchain-related products and services and formulating a timely regulatory response. To facilitate these objectives, this mechanism could include formal planning documents that establish the frequency of meetings and processes for identifying risks and responding to them within agreed-upon time frames. (Recommendation 7) |
SEC neither agreed nor disagreed with the recommendation. SEC noted that it has already coordinated through venues including the Financial Stability Oversight Council, the President's Working Group, and some international organizations to identify risks related to crypto assets. However, the regulators' coordination efforts have not always addressed risks posed by crypto assets in a timely manner. We maintain that a formal coordination mechanism focused on collectively identifying risks posed by blockchain-related products and services and formulating timely regulatory responses could improve protections for consumers and investors, mitigate illicit finance and threats to financial stability, and promote responsible innovation and U.S. competitiveness.
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