Treasury Secretary Janet Yellen has made a strong call for Congress to enact legislation aimed at regulating the cryptocurrency market.

The urgency of this call comes in the wake of the collapse of the cryptocurrency exchange FTX, which has exposed critical vulnerabilities in the digital asset space. 

Addressing the regulatory void

The spotlight has been thrust upon the gaps in digital asset regulation with Secretary Yellen emphasizing the need for explicit legal frameworks to govern the spot market for digital assets that are not classified as securities. 

Her push for legislation comes alongside repeated warnings about the lack of oversight in digital asset markets. 

The proposed Financial Innovation and Technology Act aims to provide federal regulators with authoritative oversight over digital asset markets and seeks to address the lack of clear regulatory structures currently affecting the industry.

The FSOC's 2022 report stressed the absence of direct oversight, the potential for regulatory arbitrage, and the inadequacy of market structures under current laws as areas of significant concern. 

This legislation would not only bring clarity to the treatment of digital assets but also bolster customer protection and disclosures, aligning them more closely with existing financial regulatory systems.

Stablecoin risks 

In her testimony, Secretary Yellen mentioned that stablecoins, in particular, present risks to the financial system that require a well-defined regulatory approach. 

Addressing lawmakers, Yellen underscored that a federal regulator should have the power to prevent certain entities from issuing stablecoins, seeking to establish a regulatory "floor" that would standardize compliance across all states.

Despite bipartisan tensions, a stablecoin regulation bill has progressed, albeit pending a House vote.