FSOC Principals Meeting

Financial Stability Oversight Council (FSOC)

Principals Meeting

Monday, October 3, 2022

Topline

The Council discussed their report in response to the Biden Administration’s Executive Order on Ensuring Responsible Development of Digital Assets and voted to approve their report.

The Council voted to approve the resolution on establishing the Climate-related Financial Risk Advisory Committee and on approving the initial membership of the Committee.

The Council received an update on the upcoming Treasury report on cloud-based services in the financial sector.

Discussion and Vote on FSOC’s Report in Response to the Executive Order Ensuring Responsible Development of Digital Assets

Jonathan Rose, on detail at FSOC from the Federal Reserve Bank of Chicago

Rose gave a high-level presentation of the report. He said the report found crypto asset activity could pose stability risks under certain conditions, such as if growth occurs without adherence to or being paired with regulation. Rose said Speculation-driven prices, operational vulnerabilities, leverage, and run risk create stability issues. He closed by outlining the three gaps the report identifies: (1) Spot market for assets not securities are subject to federal regulation, so they may not be subject to a framework that fits them; (2) crypto asset businesses do not have a consistent or comprehensive framework to engage in regulatory arbitrage; and (3) a number of trading platforms offer trading direct to retail investors, which poses risk.

Janet Yellen, Secretary, Department of the Treasury

Yellen said the government should promote innovation that protects our national security and contributes to economic competitiveness. She pointed out the council’s report finds the current regulatory framework has helped isolate traditional institutions from crypto-related risks, but crypto firms can pose risks. She closed by saying they provide a strong foundation to lawmakers to mitigate risks while recognizing the benefits.

Jerome Powell, Chair, Federal Reserve Board

Powell said he supports the report and acting now will allow them to support responsible innovation while preserving stability.

Gary Gensler, Chair, Securities and Exchange Commission (SEC)

Gensler supports the report, saying the crypto market is highly volatile and cannot exist outside of public policy frameworks. He reiterated his stance that crypto tokens are securities and that the tokens and firms should be treated as such. Gensler closed by pointing out the Commodity Futures Trading Commission (CFTC) and SEC currently have dual registrants, so it can be done if that is what crypto exchanges have to do.

Michael Hsu, Acting Comptroller of the Currency

Hsu said it is critical that FSOC and Congress prioritize agency coordination, a prudential framework, and regulatory visibility and authorities over all crypto assets. He closed by saying his office will ensure the nexus between crypto and banking will not be a channel for cross contagion.

Martin Gruenberg, Federal Deposit Insurance Corporation Chair

Gruenberg supported the report.

Rostin Behnam, Commodity Futures Trading Commission Chair

Behnam supported the report and said he agrees with many, if not all, of what Gensler said. He committed that the CFTC would remain a proactive enforcer with their current authorities while awaiting new authorities.

Charles Cooper, Texas Banking Department Commissioner

Cooper said they need to balance responsible innovation with safeguarding the market and consumers. He also stressed cooperative federalism.

Rohit Chopra, Consumer Financial Protection Bureau Chair

Director Chopra supports the report and pointed out that a fast and resilient payment system is good for consumers, businesses, and all of us. He also said it was important to highlight that stablecoins provide opportunities and risks and that stablecoins are not yet ready for use as payments. He closed by saying the entire crypto ecosystem’s opacity, leverage, and risk can disrupt the broader system.

The resolution on the report was approved.

Vote on Establishment and Initial Membership of the Council’s Climate-related Financial Risk Advisory Committee

Janet Yellen, Secretary, Department of the Treasury

Secretary Yellen said agencies have made great strides in understanding the risks and that the Advisory Committee with be crucial to including all stakeholders. She closed by saying that addressing the risks is an urgent priority and requires their collective efforts.

The resolution on establishment was approved.

The resolution on membership was approved.

Update on the Upcoming Treasury Report on Cloud Services Adoption in the Financial Sector

Todd Conklin, Counselor to the Deputy Secretary, Department of Treasury

Conklin said the report will assess how cloud services are being used, how they may evolve, and what gaps may pose risks to stability. He noted that it is the private sector, not the government, that has responsibility for design, implementation, and risk of third-party services. Conklin said they are considering a wide range of input to make sure decisions are data-driven and sound and listed the four streams of input they are relying on: (1) input from Financial and Banking Information Infrastructure Committee members; (2) lessons learned from Treasury’s cloud adoption journey; (3) relevant literature since they last examined cloud services; and (4) discussions with chief information officers and information security experts. He closed by saying they will continue to collaborate with the private sector and international partners.

Janet Yellen, Secretary, Department of the Treasury

Yellen said the interdependency of cloud networks magnify cyber risks.

Rohit Chopra, Chair, Consumer Financial Protection Bureau

Chopra pointed out it is important to understand how this topic uniquely effects the financial services sector.

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