The U.S. Treasury is warning in three new reports that cryptocurrencies pose meaningful risks for consumers, investors, and businesses if not properly regulated.
The government is also recommended moving forward with work on a central bank digital currency, but stopped short of recommending one.
The reports encourage the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) to “aggressively” pursue investigations and enforcement actions against crypto companies that aren’t in compliance with laws.
Treasury also urges the Consumer Financial Protection Bureau (CFPB) and Federal Trade Commission (FTC) to double down on efforts to monitor consumer complaints and to enforce against unfair, deceptive, or abusive practices.
“At the same time, if these risks are mitigated, digital assets and other emerging technologies could offer significant opportunities,” said Treasury Secretary Janet Yellen.
One of the reports contends customers were regularly mislead about crypto’s features and expected returns, and that non-compliance with regulations is widespread. One study found nearly a quarter of digital coin offerings had disclosure or transparency issues, including plagiarized documents or false promises of guaranteed returns.
'Highest urgency'
The second of Treasury's three reports recommends moving forward with work on a CBDC, or central bank digital currency, in case it’s determined to be in the national interest. While no decisions have been made to issue a CBDC, the report is meant to help policymakers understand the technical design choices of a CBDC system.
“Consistent with the President’s directive to place the 'highest urgency' on research and development of a U.S. central bank digital currency, the Administration encourages the Federal Reserve to continue its research and experimentation,” NEC Director Brian Deese said in a statement.
Deese said the White House also launched an interagency working group, including the National Security Council and Treasury, to support the Fed’s efforts by the considering policy implications of a potential CBDC, especially for our national security. The group will meet regularly to discuss updates and progress.
Treasury says a CBDC would be considered legal tender and would be convertible one-for-one into reserve balances or paper currency.
A CBDC would need to clear and settle with finality nearly instantly.
The report finds a U.S. CBDC has the potential to enable a more efficient payment system that boosts economic growth and stability while also protecting against cyber risks, safeguarding the privacy of sensitive data, and reducing the risks of illegal financial transactions.
The report also finds a CBDC could help preserve U.S. global financial leadership and support the effectiveness of sanctions. But Treasury finds a CBDC could also have unintended consequences, including runs on a CBDC in times of stress.
Treasury is encouraging the Federal Reserve to continue its work on a potential CBDC.
Fighting crime
The third report lays out a detailed plan to combat the use of crypto for financial crimes, such as money laundering and terrorism financing.
Treasury recommends strengthening AML/CFT supervision of crypto activities, disrupting illegal actors, expanding dialogue between public and private sectors, and improving global regulation. The plan also recommends monitoring risks in the crypto sector continuously to identify gaps in regulation.
As part of further research, The Office of Science and Technology Policy is kickstarting crypto research on next-generation cryptography, transaction programmability, cybersecurity and privacy protections, and ways to mitigate the environmental impacts of digital assets.
Meanwhile, the Department of Energy, the Environmental Protection Agency, and other agencies are being directed to consider tracking the impact of crypto on the environment, developing performance standards, and providing local authorities with the tools and resources, to mitigate environmental harm.
The White House last week issued a climate report on crypto which found crypto assets consume between 1% and 2% of U.S. electricity each year. The White House also found crypto asset activity produces between 0.4% to 0.8% of U.S. greenhouse gas emissions, similar to the emissions from iron and steel production in the United States, according to Alondra Nelson, Director of the White House Office of Science and Technology Policy.
“By way of comparison, the crypto asset industry is expanding rapidly using more electricity and producing more emissions,” said Nelson. “Crypto mining affects local communities with noise pollution, as well as air and water pollution from direct fossil fired electricity.”
More reports on crypto oversight are due out in October from Treasury.
In October, the Financial Stability Oversight Council, which oversees risks to the financial system, will publish a report discussing the risks digital assets pose to financial stability, identifying regulatory gaps, and making recommendations to ensure financial stability.
These reports, the first of more to come, are being released six months after President Joe Biden issued an executive order directing agencies to study cryptocurrencies and a CBDC, and come up with a government-wide approach to regulating digital assets.
The order laid out a national policy for digital assets across priorities, including, consumer and investor protection, financial stability, illicit finance, maintaining U.S. leadership in the global financial system and financial inclusion.
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