Treasury will warn White House that cryptocurrency needs regulation

The Treasury Department will warn the White House that cryptocurrencies could pose significant financial risks that outweigh their benefits unless the government rolls out major new regulations, according to two people familiar with the matter.

Through four separate reports this month, Treasury is expected to make clear that the Biden administrations top economic officials believe crypto needs strong oversight, as lawmakers weigh new rules for the digital assets.

Treasurys reports will highlight the economic danger of cryptocurrencies in several key areas, including the fraud risks they pose for investors, the two people familiar with the matter said, speaking on the condition of anonymity to discuss the reports before theyre public. Treasurys assessments conclude that cryptocurrencies do not yet pose a stability risk to the broader financial system but that the situation could change rapidly.

One of the reports will focus in particular on the financial hazards posed by stablecoins, a form of cryptocurrency that is in theory pegged to the value of the U.S. dollar, the people said. Treasury last fall called on Congress to give banking regulators new authority to police those digital tokens, but lawmakers have yet to reach agreement on how to do so. Meanwhile, the collapse of a $60 billion stablecoin project called Terra this spring helped accelerate a broader crypto market downturn thats ongoing.

Lawmakers are considering forcing the government to write federal rules for the industry, as crypto interests have poured money into a lobbying campaign to shape the debate. The sector is pushing to establish the Commodity Futures Trading Commission as its primary regulator, believing it is friendlier than the Securities and Exchange Commission would be. So far, the industry appears to be winning: Three bipartisan bills introduced this year all codify a leading role for the CFTC.

It was not immediately clear how Treasury would weigh in on that question or others that are dividing crypto interests and consumer and investor advocates. A Treasury spokesman declined to comment.

Treasury is trying to create the analytical basis for very strong oversight of this sector of finance, one of the people familiar with the matter said. Theyre also hoping that with this kind of report, it becomes hard to have regulations that back off of tough oversight of the industry. This framework would serve as a benchmark, to say Lets be focused on these risks and not be carried away with the technology and industry promises.

The reports are responding to an executive order that President Biden signed in March for a comprehensive review of the federal governments approach to digital assets, from their environmental impact to their potential for promoting financial inclusion. At the time, industry leaders said they were encouraged by the development, framing it as an acknowledgment of the sectors staying power by the most powerful voice in Washington.

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Yet Treasury Secretary Janet L. Yellen has been a frequent skeptic of crypto, despite taking pains to stress that it could result in meaningful new innovations. Her department recently drew First Amendment complaints from the industry when it imposed sanctions on a crypto-anonymizing program known as Tornado Cash, a preferred tool of North Korean hackers. Treasury officials push for new requirements also complicated a bipartisan House effort to enact a new oversight regime for stablecoins, according to a CoinDesk report earlier this month.

Mark Hays, who specializes in crypto issues for Americans for Financial Reform, a left-leaning group, said Treasury officials have met with a range of groups, including his, about the upcoming reports. Hays cited Federal Trade Commission data showing that $1 of every $4 reported lost to fraud was paid in cryptocurrency. Consumers have reported more than $1 billion lost to crypto from January 2021 to March 2022, Hays said, citing the FTC data.

We mostly see a predatory model similar to what we saw in the run-up to the 2008 financial crisis, Hays said. We hope the report finds a way to communicate the scale and severity of that potential harm.

Dave Grimaldi, head of government affairs for the Blockchain Association, an industry lobbying group, praised the administration for ordering the review. Doing a scan of the entire federal government to find out where jurisdiction lies for a new technology with major consumer impact is [a] smart process, he said. The White House understands the winds of change are blowing toward decentralized payment systems and away from traditional and institutional finance as we know it.

Tyler Gellasch, president and CEO of the investor advocacy organization Healthy Markets, said he is skeptical the report will propose a tough approach.

Many crypto industry practices are simply illegal in the securities markets, so avoiding the SECs rules is essential to the crypto industrys bottom lines, he said. If the report recommends giving the CFTC new authority over spot trading in digital assets, as many expect, we dont expect see public celebrations, but there would still be a huge sighs of relief from K Street to Silicon Valley to China.