US Financial Stability Oversight Council: Bitcoin could become a "threat" to financial stability

The Financial Stability Oversight Council (FSOC) has warned that Bitcoin and blockchain technology are a threat to financial stability, and they have pointed out that if cryptocurrencies continue to undermine the influence of traditional centralized intermediaries, they will need to take certain measures to adapt to market structure.

The Financial Stability Oversight Council, whose members include the Federal Reserve, the Securities and Exchange Commission, and the Treasury Department, is charged with identifying risks to U.S. financial stability, promoting market discipline, and responding to emerging risks to financial stability.

The committee highlighted that concerns about digital currencies were raised for the first time in its annual financial report on the financial stability of the U.S. financial system.

Bitcoin has become a popular alternative currency to central bank-managed and government-managed currencies, with the advantage of being able to conduct transactions on a centralized database without being regulated by government agencies.

Report highlights distributed ledger technology

In its annual report on Tuesday, the Financial Stability Oversight Council noted that distributed ledger technology, like most new technologies, carries uncertainties and risks that market regulators and participants must monitor at all times.

The report reviewed the advantages of distributed ledger systems, which it noted could allow market participants to directly manage various types of transactions, bypassing the need to trust third parties.

Supporters believe that distributed ledger technology can significantly improve efficiency by replacing manual and intensive reconciliation processes and help reduce risks related to trading, settlement, clearing and custody services. The system can reduce risks and improve the resilience of financial networks.

The report states that because distributed ledgers are widely used and auditable, they can provide a valuable mechanism to increase market transparency. Since transactions are conducted directly without third trusted parties, the ledgers can limit the concentration risk of companies and infrastructure.

In addition, by improving the accuracy and speed of settlement systems, the system can reduce counterparty and business risks that arise when exchanging financial assets. For example, distributed ledger systems can be used to assist in complex automated transactions and multi-party transactions, such as the payment of bonds and insurance certificates through smart contracts.

The Financial Stability Oversight Council noted that market participants have insufficient experience operating distributed ledgers, so operational flaws in the system may not be apparent in the short term.

Changes in regulatory bodies

Some Bitcoin advocates point to government concerns that its use by criminals and terrorists could undermine the digital currency. Regulators required anti-money laundering checks on Bitcoin processors in its early days, but otherwise allowed the currency to flourish.

The FSOC noted that they continue to monitor developments in distributed ledger technology and remain vigilant to potential issues, while also acknowledging that they are unsure whether any such potential issues will arise.

The Financial Stability Oversight Council noted that bitcoin transactions have experienced “ dramatic ” transaction failures and trade delays in recent months, caused by new transactions being generated faster than they can be posted on the bitcoin blockchain.

Regulators point out security gaps

Because cryptocurrency systems are designed to prevent fraud by only one party, regulators say the system could be vulnerable to fraud attacks through collusion among system participants.

The Financial Stability Oversight Council noted that if cryptocurrencies continue to undermine the influence of traditional centralized intermediaries, they will need to take certain measures to adapt to market structure.

The report states that because market participants using distributed ledger systems can cross borders or jurisdictions, regulators will need to achieve a “substantial degree” of coordination to manage and identify the risks associated with the system.