U.S. financial regulators see Bitcoin as threat to market stability
Wed 22 Jun 2016
The Financial Stability Oversight Council (FSOC), a group of powerful U.S. regulators, has warned that Bitcoin and blockchain technologies could present a threat to financial stability and has advised that market structures should adapt in preparation for a reduced importance of conventional, centralised banking.
The FSOC includes representatives from the Federal Reserve, the Securities and Exchange Commission, and the Department of the Treasury. The Council is responsible for analysing risk factors in the U.S. financial system, promoting market discipline, and responding to predicted threats against stability.
The group highlighted in its annual report [PDF], published yesterday, that it is concerned about the potential impact of digital currencies. It argues that the distributed ledger systems would lead to uncertainty and risks which should be closely monitored by market participants and regulatory bodies.
The report explained: ‘Market participants have limited experience working with distributed ledger systems, and it is possible that operational vulnerabilities associated with such systems may not become apparent until they are deployed at scale.’
It noted in particular that Bitcoin had experienced ‘dramatic’ increases recently in transaction failures and trade delays due to the speed of transactions overtaking the rate they are added to the blockchain. The group also added that some systems could be vulnerable to fraud via participant collusion.
However, weighing up the possible benefits of the technologies, such as improving efficiency and transparency, the FSOC argued that digital currencies should be allowed to develop further, but measures must be put in place to regulate their usage.
‘To the extent that distributed ledger systems ultimately reduce the importance of…more centralized intermediaries, regulators will need to adapt to the changing market structure,’ the report stated.
As distributed systems span national boundaries, the FSOC also proposed that considerable coordination between jurisdictions should be established to help identify and address risks collaboratively.