Financial Stability Oversight Council Takes Aim at DeFi and Stablecoins in Annual Report

The Financial Stability Oversight Council (FSOC) recently published its annual report for 2021.

Of particular note was its section on digital assets, in which it considered risk associated with DeFi and the extent to which stablecoins might fall under the jurisdiction of U.S. regulators.

FSOC on Stablecoins

On stablecoins, the FSOC said:

“DeFi projects and stablecoin arrangements may implicate the jurisdiction of the SEC, the CFTC, and other authorities. Depending on their structure, stablecoins, or certain parts of stablecoin arrangements, may be one or a combination of securities, commodities, and derivatives. Moreover, much of the trading, lending, and borrowing activity currently fueled by stablecoins on digital asset trading platforms and within DeFi similarly may constitute either or both of securities and derivatives transactions that must be conducted in compliance with federal securities laws and the Commodity Exchange Act (CEA), including applicable regulations”.

The report noted that the market capitalization of stablecoins had grown 500% in 2021 and that stablecoin issuers tend not to be subject to proper audit standards. Tether has particularly come under some scrutiny this year with regard to the quality of its reserves.

FSOC Annual Report on DeFi

The report also noted that while interest had grown in digital asset investing during 2021, most investors remain cautious due to the inherent volatility in the space.

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In particular, the report looked at the rise of DeFi in 2021 and expressed concerns regarding the risks for investors. Risks the FSOC noted included:

• risk of loss due to market value fluctuations,
• operational issues,
• and cybersecurity threats

About the FSOC

FSOC was set up pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), with a view to responding to emerging threats to the stability of the U.S. financial system.