US Financial Stability Oversight Council: Online lending and distributed ledger technology pose potential risks

Rage Review : The 2010 Dodd-Frank Act authorized the establishment of the U.S. Financial Stability Oversight Council, which has released its sixth annual report so far. This year, information on distributed ledgers, blockchain, and digital currencies appeared for the first time. The report points out that these factors and online lending threaten the security and stability of the financial system. Although these technologies are not yet mature and subversive, the committee still calls on regulators to remain vigilant because these technologies have a trend of continuous development and some risks will only be revealed after large-scale technical applications.

Translation: Annie_Xu

U.S. policymakers said in an annual report on threats to the financial system on Tuesday that the rapid growth of online lending and digital currency applications requires close scrutiny by relevant departments, according to news reports.

The Financial Stability Oversight Council (FSOC), a group of senior officials from the Federal Reserve and the Securities and Exchange Commission, also noted that the financial system continues to be threatened by Internet attacks and low interest rates, although overall these were only moderate threats.

Jacob Lew

Risk Panel Chair and Finance Minister Jacob Lew said:

"U.S. markets and financial institutions continue to evolve, and we must remain vigilant and respond quickly to new challenges to maintain the safety, soundness, and resilience of our financial system."

The discussion of lending market risks and the underlying technologies of digital currencies such as Bitcoin, such as blockchain and distributed ledgers, has become a new part of the committee’s annual report. This is the sixth annual report since it was established in 2010 in accordance with the Dodd-Frank Amendment Act.

In addition to distributed ledger systems, regulators must also be wary of the growth of lending markets, or the use of online platforms to lend money to individuals, the FSOC said. Both financial innovations currently play a "relatively small role in financial markets but have recently shown a trend of substantial growth."

"This is mainly because the innovations are still immature and not disruptive. They require the attention and vigilance of financial regulators."

Beyond advising vigilance, the committee did not recommend any measures to address risks related to lending markets and blockchain.

Online lenders provided $22 billion in consumer and business loans last year, according to Autonomous Research, a research firm. Although that only accounts for 6% of such loans, it is expected to grow 75% this year.

Meanwhile, dozens of U.S. banks are testing blockchain as it is seen as a safer and faster way to transfer money and other assets. Autonomous said 2,300 companies applied to join the Linux Foundation's blockchain project in 2016, including Nasdaq, which is working with Estonia to develop an electronic shareholder voting system using blockchain.

The FSOC said:

“Distributed ledger systems place high demands on cooperation because their user base spans national borders and jurisdictions.”

“Market participants have limited experience with distributed ledger systems and may only see operational vulnerabilities in the system when it is widely used.”

The FSOC said regulators need to be alert to whether marketplace lenders are violating lending standards.

"In other markets, middlemen arrange loans and collect fees but sometimes do not own the proceeds of the loan, which allows middlemen to laxly evaluate and monitor the loans."