Treasury Secretary Janet Yellen added her voice to the growing chorus of Washington leaders demanding action following the collapse of crypto exchange FTX last week, saying Wednesday that the collapse demonstrated “the need for more effective oversight of cryptocurrency markets.”
“Some of the risks we identified in these reports, including the mixing of client assets, lack of transparency, and conflicts of interest, were at the center of the crypto market tensions seen over the past week,” said Yellen said.
Despite these reportsthere is not yet a comprehensive framework that would bring crypto under one federal regulatory umbrella.
Financial regulators like the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) have blocked the release of specific guidelines for crypto firms and exchanges, although both agencies have enforcement actions sporadically pursued against some crypto companies. Federal lawmakers, meanwhile, are is currently considering legislation this would clarify the regulation of crypto, although no such bill has yet been put to a vote.
Washington was invigorated by a new urgency to play a bigger role in overseeing the crypto market this week after the stunning defeat of once-dominant FTX and its sister trading firm Alameda Research. Last week, a report surfaced showing that nearly half of Alameda’s $14 billion balance sheet consisted of FTT, the utility token used to obtain discounts on trading fees on the FTX platform. Sam Bankman-Fried, founder of FTX and Alameda, had long insisted that the two companies were separate entities.
The news prompted crypto exchange Binance to announcehe would liquidate his $580 million FTT position; this announcement triggered a subsequent multi-billion dollar bank run on FTX, and the exchange suspended withdrawals 48 hours later due to insufficient funds. Binance decided to bail out once-rival FTX, but within a day the deal fell apart, apparently due to the troubling state of FTX’s books. On Friday, FTX filed for bankruptcy.
The saga, and its devastating impact on hundreds of thousands of customers, has provided regulators and lawmakers in Washington with more ammunition to target the crypto industry.
Yellen seemed eager to activate not only federal agencies like the SEC, but also lawmakers, in her call for more regulatory action.
“The federal government, including Congress […] must act quickly to close the regulatory gaps identified by the Biden administration,” the Treasury Secretary said.
But Yellen also blamed federal regulators, chastising them for not using existing laws to prevent the current market turmoil.
“We have very strict investor and consumer protection laws for most of our financial products and markets that are designed to address these risks,” Yellen said. “Where existing regulations apply, they must be rigorously enforced so that the same protections and principles apply to crypto assets and services.”
The risks posed by failing to effectively regulate crypto – either by taking advantage of existing laws or creating a new framework – could be far more devastating and far-reaching than even current conditions, the secretary warned.
“The fallout from the events in the crypto markets has been limited,” Yellen said. “But […] further interconnections of the traditional financial system and crypto markets could raise broader financial stability issues,” she said, echoing concerns expressed by the Treasury Secretary. previously raised.
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