Financial Stability, the Super Bowl, and Cryptocurrency
If you watched the Super Bowl last weekend, you enjoyed a great game (unless you’re an Eagles fan.) But did you notice the one thing that was missing?
That’s right: cryptocurrency ads.
According to The New York Times, crypto companies spent a combined $39 million buying Super Bowl commercials last year. This year, there was not one single digital asset ad during the biggest football game of the year.
Perhaps that was because, according to a CNBC poll from late last year, only 8 percent of Americans have a favorable view of cryptocurrency. (Reversing that kind of negative public opinion will take a more sustained effort than a 30-second ad with Snoop Dog and Martha Stewart, so why bother?) But, more likely, the lack of digital asset ads this year was due to the dawning of “crypto winter” – and the fact that state and federal policymakers clearly have digital assets in their crosshairs right now. Indeed, the Senate Banking Committee held a hearing this week on the crash of digital asset firm FTX in which Linda Jeng, chief global regulatory officer and general counsel for major crypto advocacy group Crypto Council for Innovation, acknowledged, “This is a key moment for our transition to a digital economy … We are at a decision point where how we build our legal and regulatory foundation will determine our digital future for decades to come.”
Most of Washington agrees with Jeng’s sentiment. In fact, on Monday, The Wall Street Journal reported U.S. Treasury Department officials told a closed meeting of the Financial Stability Oversight Council (FSOC) that the regulation of nonbank financial firms, including cryptocurrency firms, should be a priority this year.
This week, we’ll review the history of FSOC and anticipate what regulatory changes are likely to come. But first: a reminder of what the FSOC is.
What Is FSOC And What Power Does It Have?
The Financial Stability Oversight Council, or FSOC, is a product of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Its mandate is to provide “comprehensive monitoring of the stability of our nation’s financial system” by “identifying risks to the financial stability of the United States; promoting market discipline; and responding to emerging threats to the stability of the U.S. financial system.”
Basically, the body was created to ensure coordination across all of the various federal financial regulatory agencies and to try to prevent the sort of meltdown that happened in the U.S. economy in 2008 and 2009.
But FSOC doesn’t actually have regulatory authority. As the Congressional Research Service (CRS) has explained, the council’s “role is to make policy recommendations to member agencies where authority already exists or to Congress where additional authority is needed.” (Emphasis added.)
In other words, FSOC is an adviser of sorts — albeit one that is made up of the most powerful financial regulators in the country and has the ear of the president and members of Congress. (Or some of them, anyway, as we will discuss later.)
The FSOC is chaired by the U.S. Secretary of the Treasury and consists of 10 voting members, including the Treasury secretary, and 5 nonvoting members. Other voting members include the directors or chairs of the banking regulatory agencies (Federal Deposit Insurance Corporation, Federal Reserve, Office of the Comptroller of the Currency, and the National Credit Union Administration), the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Federal Housing Finance Agency, the Consumer Financial Protection Bureau, and an independent insurance expert appointed by the president. Nonvoting members are the directors of the federal Office of Financial Research and Federal Insurance Office, and state regulatory representatives that represent insurance, banking, and securities.
What Has FSOC Been Up To Recently?
As the CRS has explained, in the wake of 2008’s Great Recession, some observers argued “communication and coordination of financial regulators was insufficient to prevent” that year’s financial crisis.
FSOC is supposed to provide the type of coordination that was lacking.
In addition to bringing together the agencies referenced above, FSOC aims to mitigate risk to the financial system by designating nonbank financial companies and financial market utilities as systemically important, which, as CRS has explained, subjects those entities to heightened prudential regulation and the direct regulatory authority of other agencies. How does the FSOC determine if those entities are engaging in risky behavior? Again, here is CRS: “Three of the many relevant factors used for designation include leverage, interconnectedness with other systemically important nonbank financial institutions (SIFIs), and whether a primary prudential regulator already has responsibility for the SIFI and the activity.”
In the years immediately after Dodd-Frank created the FSOC, only a handful of entities were designated systemically important. Democrats on Capitol Hill, including Sen. Elizabeth Warren (D-Mass.) have routinely argued for a broader set of nonbank financial services companies to be designated as SIFIs and thus placed under regulatory supervision.
The Trump administration, not surprisingly, found itself on the opposite end of the spectrum from Sen. Warren on this question. And so, as The Wall Street Journal article from this week noted, the Trump administration issued rules that “made it harder for nonbanks to be categorized as systemically important.” The Trump administration also cut funding and staff for FSOC and the Trump-era Treasury Department implemented measures to require a cost-benefit analysis to ensure the costs of FSOC’s decisions are justified by the expected benefits.
The Journal said at least half of the 10 current voting members of the panel, including Treasury Secretary Janet Yellen and CFPB Director Rohit Chopra, want to overturn the Trump-era regulation that lightened FSOC’s oversight capabilities. In truth, given that the majority of FSOC voting members are now President Biden’s appointees, we think that number is understated.
Since the early days of the Biden administration, the President and his team have made it clear they see a strong role for FSOC in mitigating financial risk in a much broader context than the Trump administration.
As the Treasury Department has explained, in 2021, FSOC identified three key priorities related to significant vulnerabilities in the financial system: nonbank financial intermediation, climate-related financial risk, and Treasury market resilience. It identified a fourth key priority in 2022: risks related to digital assets.
On digital assets specifically, in October 2022, FSOC published its “Report on Digital Asset Financial Stability Risks and Regulation,” which reviewed the financial stability risks and regulatory gaps posed by digital assets and provides recommendations to address such risks. That report, as the Treasury Department explained, concluded that “crypto-asset activities could pose risks to the stability of the U.S. financial system if their interconnections with the traditional financial system or their overall scale were to grow without adherence to or the development of appropriate regulation, including enforcement of the existing regulatory structure.”
Clearly, FSOC is gunning for more power and influence when it comes to digital assets.
What Is The Biden Administration’s Next Step On FSOC?
So what will the Biden administration do when comes to overturning the Trump-era rules for designating which companies are systemically important? The details are still few and far between, but last week The Journal reported, “People familiar with [FSOC’s] deliberations previously told The Wall Street Journal that any possible change to the rules would be aimed at giving the group more flexibility rather than targeting any specific firm for additional oversight.”
A Wall Street Journal report last fall was a bit more specific about the types of changes the Biden administration may seek. That article said FSOC leaders at least want to end the requirement that FSOC conduct a “lengthy review “of activities in a potentially risky sector before targeting specific firms.
If the Biden administration decides to overturn its predecessor’s rules to make it easier for the regulatory agencies to supervise nonbank financial services firms, chances are it will run into opposition on Capitol Hill. As The Journal noted, and as we alluded to above, Republicans “have long criticized the council’s ability to designate firms as systemically important, saying the panel is too political, opaque and overreaching.” And Republicans generally want a lighter touch than Democrats when it comes to crypto regulation. Indeed, during this week’s Senate Banking Committee hearing, Ranking Member Tim Scott (R-S. Carolina), a potential 2024 presidential candidate, said it was important for lawmakers to ensure they do not create new regulations that interfere with the crypto industry ability to “innovate.”
Republican lawmakers already have launched attempts to undo Biden administration Environmental Protection Act rules using the Congressional Review Act (CRA), which allows Congress to introduce and consider legislation to overturn executive branch rulemakings.
Republicans have been critical of digital asset firms — and may support giving regulators more control over and oversight of these firms — but they may not be willing to give FSOC the ability to designate these firms as systemically important and could try to use the CRA if Treasury Secretary Yellen, CFPB Director Chopra, and other Biden administration officials try to re-broaden FSOC’s powers.
Regardless of what happens to the rules governing FSOC oversight, however, the council clearly has crypto firms in its sights and will use its advisory capability to urge federal lawmakers to act. As CoinTelegraph noted, a report issued last December after the collapse of FTX, recommended members of Congress pass legislation granting “explicit rulemaking authority for federal financial regulators over the spot market for crypto-assets.” And, while it’s still early days in the new Congress, there does appear to be bipartisan consensus that lawmakers should pass a crypto regulation bill of some sort.
And so when you watch the big game next year, you can pay attention not only to how many crypto ads you see, but also to how many of those crypto companies are supervised by one or more federal agencies.