Republicans probe Treasury Secretary Janet Yellen on regulatory gaps in spot crypto markets

Republican lawmakers sent a letter to US Treasury Secretary Janet Yellen for answers on how the Financial Stability Oversight Council she heads determines how cryptocurrencies should be defined at the federal level.

Lawmakers asked Yellen about coordination between the Securities and Exchange Commission and the Commodity Futures Trading Commission. CFTC Chairman Rostin Behnam and SEC Chairman Gary Gensler are members of the FSOC, which is tasked with monitoring the stability of the financial system.

The FSOC has denounced regulatory loopholes in the digital asset spot market, according to a 2022 report reportand recommended that legislation be passed that would give authority to regulate the spot market to financial regulators.

""Despite identifying these gaps, regulators have failed to facilitate an environment that ensures consumer protection and encourages digital asset innovation in the United States," lawmakers said in a statement Tuesday.

House Financial Services Committee Chairman Patrick McHenry of North Carolina, House Agriculture Committee Chairman Glenn "GT" Thompson of Pennsylvania, Rep. French Hill of Arkansas, and Rep. Dusty Johnson of South Dakota signed that letter.

Yellen was asked about the FSOC's views on how securities laws apply to "crypto asset issuers," citing last year's court case involving Ripple Labs and the SEC. A New York judge ruled in July that some of Ripple's XRP sales did not violate securities laws due to a blind offering process implemented for them, while ruling that other direct sales of the token to institutional investors were, in fact, securities.

Lawmakers also asked whether the FSOC believes that both bitcoin and ether are not securities and whether it would be appropriate to expand the CFTC's jurisdiction to cover the spot market. They said they want a response by February 20.

The four cosigners are also leading an effort for a bill called the Financial Technology and Innovation Act for the 21st Century, which takes a comprehensive approach to regulating cryptocurrencies and essentially giving the CFTC new authorities on the cash market, although they have yet to gain the necessary support and some say that bill is the “big crypto wish list.” Lawmakers said Tuesday that the bill would close the loopholes mentioned by the FSOC.

Yellen at the Capitol

Yellen testified before the House Financial Services Committee on Tuesday and again called on Congress to pass legislation to regulate stablecoins and the spot market for crypto assets that are not securities.

"There are many areas with respect to digital assets where we have clear regulatory authority, but we have identified some gaps where, to protect consumer investors and address financial stability risks, it would be very helpful for Congress to take action." to fill those gaps," Yellen said.

The CFTC has no regulatory authority over spot markets, so a regulatory gap exists, Yellen said.

The Treasury Secretary then focused on stablecoins, saying they pose risks to the financial system.

"We would very much appreciate an effort by Congress to create a regulatory framework that would be appropriate to address those risks," Yellen said.

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