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FACT SHEET: The Financial Stability Oversight Council’s Report on Digital Asset 

Financial Stability Risks and Regulation

October 3, 2022 

The Financial Stability Oversight Council (Council) today released its Report on Digital Asset 

Financial Stability Risks and Regulation. In March 2022, the Secretary of the Treasury 

convened the Council to produce the report in response to Section 6 of President Biden’s 

Executive Order 14067 on “Ensuring Responsible Development of Digital Assets.” The 

report reviews the specific financial stability risks and regulatory gaps posed by various types of 

digital assets and provides recommendations to address such risks. 

Financial stability risks

Crypto-asset activities could pose risks to the stability of the U.S. financial system if their 

interconnections with the traditional financial system or their overall scale were to grow without 

adherence to or being paired with appropriate regulation, including enforcement of the existing 

regulatory structure. 

The scale of crypto-asset activities has increased significantly in recent years. Although 

interconnections with the traditional financial system are currently relatively limited, they could 

potentially increase rapidly. Participants in the crypto-asset ecosystem and the traditional 

financial system have explored or created a variety of interconnections. Notable sources of 

potential interconnections include traditional assets held as part of stablecoin activities. Cryptoasset trading platforms may also have the potential for greater interconnections by providing a 

wide variety of services, including leveraged trading and asset custody, to a range of retail 

investors and traditional financial institutions. Consumers can also increasingly access cryptoasset activities, including through certain traditional money services businesses.

Some characteristics of crypto-asset activities have acutely amplified instability within the 

crypto-asset ecosystem. 

• Many crypto-asset activities lack basic risk controls to protect against run risk or to help 

ensure that leverage is not excessive. 

• Crypto-asset prices appear to be primarily driven by speculation rather than grounded in 

current fundamental economic use cases, and prices have repeatedly recorded significant 

and broad declines. 

• Many crypto-asset firms or activities have sizable interconnections with crypto-asset 

entities that have risky business profiles and opaque capital and liquidity positions. 

• In addition, despite the distributed nature of crypto-asset systems, operational risks may 

arise from the concentration of key services or from vulnerabilities related to distributed 

ledger technology. 

These vulnerabilities are partly attributable to the choices made by market participants, including 

crypto-asset issuers and platforms, to not implement or refuse to implement appropriate risk 
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controls, arrange for effective governance, or take other available steps that would address the 

financial stability risks of their activities.

Enforcement of the existing regulatory structure

Many nonbank firms in the crypto-asset ecosystem have advertised themselves as regulated. 

Firms often emphasize money services business regulation, though such regulation is largely 

focused on anti-money laundering controls or consumer protection requirements and does not 

provide a comprehensive framework for mitigating financial stability vulnerabilities arising from 

other activities that may be undertaken, for example, by a trading platform or stablecoin issuer. 

While some firms in the crypto-asset ecosystem have attempted to avoid the existing regulatory 

system, other firms have engaged with the existing regulatory system by obtaining trust charters 

or special state-level crypto-asset-specific charters or licenses. 

Compliance with and enforcement of the existing regulatory structure is a key step in addressing 

financial stability risks. For example, certain crypto-asset platforms may be listing securities but 

are not in compliance with exchange or broker-dealer registration requirements. In addition, 

certain crypto-asset issuers have offered and sold crypto-assets in violation of federal and state 

securities laws, because the offering and sale were not registered or conducted pursuant to an 

available exemption. Regulators have taken enforcement actions over the past several years to 

address many additional instances of non-compliance with existing rules and regulations, 

including illegally offered crypto-asset derivatives products, false statements about stablecoin 

assets, and many episodes of fraud and market manipulation. In addition, false and misleading 

statements, made directly or by implication, concerning availability of federal deposit insurance 

for a given product, are violations of the law, and have given customers the impression that they 

are protected by the government safety net when they are not. Further, misrepresentations by 

crypto-asset firms about how they are regulated have also confused consumers and investors 

regarding whether a given crypto-asset product is regulated to the same extent as other financial 

products. 

Regulatory Gaps 

Though the existing regulatory system covers large parts of the crypto-asset ecosystem, this 

report identifies three gaps in the regulation of crypto-asset activities in the United States.

• First, the spot markets for crypto-assets that are not securities are subject to limited direct

federal regulation. As a result, those markets may not feature robust rules and regulations 

designed to ensure orderly and transparent trading, prevent conflicts of interest and 

market manipulation, and protect investors and the economy more broadly. 

• Second, crypto-asset businesses do not have a consistent or comprehensive regulatory 

framework and can engage in regulatory arbitrage. Some crypto-asset businesses may 

have affiliates or subsidiaries operating under different regulatory frameworks, and no 

single regulator may have visibility into the risks across the entire business. 
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• Third, a number of crypto-asset trading platforms have proposed offering retail customers 

direct access to markets by vertically integrating the services provided by intermediaries 

such as broker-dealers or futures commission merchants. Financial stability and investor 

protection implications may arise from retail investors’ exposure to certain practices 

commonly proposed by vertically integrated trading platforms, such as automated 

liquidation. 

Recommendations

The Council notes that large parts of the crypto-asset ecosystem are covered by the existing 

regulatory structure. In applying these existing authorities, the Council recommends that its 

members take into consideration a set of principles and emphasizes the importance of continued 

enforcement of existing rules and regulations. 

To address regulatory gaps, the Council recommends: 

• the passage of legislation providing for rulemaking authority for federal financial 

regulators over the spot market for crypto-assets that are not securities; 

• steps to address regulatory arbitrage including coordination, legislation regarding risks 

posed by stablecoins, legislation relating to regulators’ authorities to have visibility into, 

and otherwise supervise, the activities of all of the affiliates and subsidiaries of cryptoasset entities, and appropriate service provider regulation; and

• study of potential vertical integration by crypto-asset firms. 

Finally, the Council recommends bolstering its members’ capacities related to data and to the 

analysis, monitoring, supervision, and regulation of crypto-asset activities.

The full report can be viewed here.