Stronger U.S. regulation of the crypto sector would benefit traditional financial firms, along with retail investors and fintechs, says Moody’s Investors Service.
In a new report, the rating agency said that proposals from the U.S. Financial Stability Oversight Council (FSOC) to address gaps in the oversight of the cryptoasset ecosystem would both limit risks and promote financial stability, as connections between the crypto sector and mainstream financial system grow.
The FSOC report identified several key gaps in the oversight of the crypto sector, including the lack of regulation of spot markets in crypto assets such as Bitcoin; opportunities for regulatory arbitrage between various federal and state regulators; and vertical integration in the crypto sector, which limits regulators’ visibility into these activities.
The report also highlighted possible mechanisms that could accelerate connections between the crypto sector and the traditional financial sector — which could intensify financial stability risks — including wider availability of crypto-based investment products, greater investment by asset managers and private equity firms, and the increased use of ordinary financial products (such as credit cards) offering crypto-based rewards.
The FSOC recommended expanded legislative authority for regulators, enhanced coordination among federal regulators, and an examination by state regulators of services offered to banks by cryptoasset service providers and others.
“Addressing regulatory gaps in the cryptoasset ecosystem would help protect customers, limit fraud and market manipulation and bolster confidence in cryptoassets, a credit positive for banks and fintechs because it would encourage technology advancements,” Moody’s said in its report.
The rating agency said that tougher regulation could allow traditional financial institutions to increase their market share in the growing crypto sector.
Crypto firms would benefit too, it said: “As digital assets increase, greater oversight would increase their safety, transparency and limit risks to the broader economy and financial stability, a credit positive for the cryptoassets industry.”