Republicans probe Treasury Secretary Janet Yellen on regulatory gaps in spot crypto markets

Republican lawmakers sent a letter to U.S. Treasury Secretary Janet Yellen looking for answers about how the Financial Stability Oversight Council she leads ascertains how cryptocurrencies should be defined at the federal level. 

Lawmakers asked Yellen about coordination between the Securities and Exchange Commission and the Commodity Futures Trading Commission. CFTC Chair Rostin Behnam and SEC Chair Gary Gensler are members of the FSOC, which is tasked with monitoring the stability of the financial system.

The FSOC has called out existing regulatory gaps in the spot market for digital assets, according to a 2022 report, and recommended legislation be passed that would give rulemaking authority to financial regulators over the spot market.

"Despite identifying these gaps, regulators have failed to facilitate an environment that ensures consumer protection and fosters digital asset innovation in the United States," the lawmakers said in a statement on Tuesday. 

House Financial Services Committee Chair Patrick McHenry of North Carolina, House Agriculture Committee Chair Glenn "GT" Thompson of Pennsylvania, Rep. French Hill of Arkansas and Rep. Dusty Johnson of South Dakota signed that letter. 

They asked Yellen about FSOC's views on how securities laws apply to "crypto-asset issuers," citing last year's court case involving Ripple Labs and the SEC. A New York judge ruled in July that some of Ripple's sales of XRP did not violate securities laws because of a blind bid process in place for them, while ruling that other direct sales of the token to institutional investors were, in fact, securities. 

Lawmakers also asked whether FSOC believes that both bitcoin and ether are not securities and whether expanding the CFTC's jurisdiction to then encompass the spot market would be appropriate. They said they want a response by Feb. 20. 

The four co-signers are also leading an effort for a bill called the Financial Innovation and Technology for the 21st Century Act, which takes a comprehensive approach to regulating crypto and would essentially give the CFTC new authorities over the cash market, though they have yet to garner the needed support with some saying the bill is the "wish-list of big crypto." The lawmakers on Tuesday said that bill would close the gaps mentioned by FSOC. 

Yellen on Capitol Hill

Yellen testified in front of the House Financial Services Committee on Tuesday, and again made the call for Congress to pass legislation to regulate stablecoins and the spot market for crypto assets that are not securities. 

"There are many areas with respect to digital assets where we do have clear regulatory authority, but we've identified some gaps where, for consumer investor protection and to address financial stability risks, it would be very useful for Congress to take action to fill those gaps," Yellen said. 

The CFTC does not have regulatory authority over spot markets, so that is a regulatory gap, Yellen said. 

The Treasury Secretary then honed in on stablecoins and said they pose risks to the financial system. 

"We would very much welcome an effort by Congress to create a regulatory framework that would be appropriate to address those risks," Yellen said.