Yellen, House Financial Services Committee and FDIC weigh in on FTX, crypto markets

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(Kitco News)- Treasury Secretary Janet Yellen was the latest US regulator to weigh in on the collapse of FTX and its impact on crypto markets and the broader economy.

Yellen released a statement Wednesday afternoon addressing the ongoing developments in crypto markets.

“The recent failure of a major cryptocurrency exchange and the unfortunate impact that has resulted for holders and investors of crypto assets demonstrate the need for more effective oversight of cryptocurrency markets,” Yellen said.

The Treasury Secretary wrote that over the past year, her department has worked with other regulators to identify risks in crypto markets. “Some of the risks we identified in these reports, including commingling of customer assets, lack of transparency, and conflicts of interest, were at the center of the crypto market stresses observed over the past week,” she said.

The United States has strong investor and consumer protection laws, she wrote, and “where existing regulations apply, they must be enforced rigorously so that the same protections and principles apply to crypto assets and services.” She urged Congress “to move quickly to fill the regulatory gaps” that the Biden Administration has identified.

Yellen also raised the spectrum of crypto markets potentially impacting the broader financial system. She warned that while “spillovers from the events in crypto markets have been limited,” a recent report by the Financial Stability Oversight Council (FSOC) warned that “further interconnections of the traditional financial system and crypto markets could raise broader financial stability concerns.”

The House Financial Services Committee also announced that they have scheduled hearings on the collapse of FTX and its impact on digital assets.

Chairwoman Maxine Waters (D-CA) and Ranking Member Patrick McHenry (R-NC) issued the joint announcement for “a bipartisan hearing into the collapse of FTX and the broader consequences for the digital asset ecosystem.”

They said the Committee expects to hear from key players at all the companies involved, including Sam Bankman-Fried, Alameda Research, Binance, and FTX, among others.

“Oversight is one of Congress’ most critical functions and we must get to the bottom of this for FTX’s customers and the American people,” said McHenry. “It’s essential that we hold bad actors accountable so responsible players can harness technology to build a more inclusive financial system.”

Waters wrote that FTX’s collapse and subsequent bankruptcy “has posed tremendous harm to over one million users, many of whom were everyday people who invested their hard-earned savings,” and referred to the exchange’s implosion as “just one out of many examples of cryptocurrency platforms that have collapsed just this past year.”

Waters also wrote that the United States needs legislative action “to ensure that digital assets entities cannot operate in the shadows outside of robust federal oversight and clear rules of the road.”

The Treasury and House statements follow earlier comments from the FDIC on the risks of crypto to the US banking system. Martin Gruenberg, Acting Chairman of the Federal Deposit Insurance Corporation (FDIC), spoke before the Senate Banking Committee on the oversight of financial regulators on Tuesday.

Gruenberg said that “cypto-assets bring with them novel and complex risks that […] are difficult to fully assess, especially with the market’s eagerness to move quickly into these products.”

He said that the value of crypto assets at any point “is driven in large part by market sentiment” and this has resulted in a “highly volatile” marketplace.

“These risks of crypto-assets are very real,” Gruenberg said. “After the bankruptcies of crypto-asset platforms that have occurred this year, there have been numerous news stories of consumers who have been unable to access their funds or savings.”

He also said that crypto firms have used “false and misleading statements concerning the availability of federal deposit insurance for their crypto products in violation of the law.”

Gruenberg said the FDIC issued cease-and-desist letters to these firms, and also issued an Advisory in July to remind insured banks of the risks related to “misrepresentations of deposit insurance by crypto-asset companies.”

Gruenberg said that stablecoins are of particular interest to the FDIC and other regulatory agencies.

He said that stablecoins have mainly been used within the crypto ecosystem to facilitate trades without the need to liquidate into fiat currencies, and “there has been no demonstration so far of their value in terms of the broader payments system,” but that their distributed ledger technology may have applications within the payments system in the future.

“This raises a host of important policy questions that will be the subject of careful attention by all of the federal financial regulators,” he said

Gruenberg added that he asked the banks the FDIC supervises in April “to notify the FDIC if they are engaging in, or planning to engage in, crypto-asset related activities” so the FDIC could assess them, and that other federal banking agencies have asked the same.

“Once the FDIC develops a better understanding of activities planned or already active, we will provide the institution with case-specific supervisory feedback,” he said. “As the FDIC and the other Federal banking agencies develop a better collective understanding of the risks associated with these activities, we expect to provide broader industry guidance on an interagency basis.”

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