The U.S. Accountability Office (GAO) believes significant regulatory gaps in the crypto industry — specifically related to spot cryptocurrency markets and stablecoins — need to be addressed via a government-wide approach before they become a risk to financial stability.

The watchdog said in a report titled “Blockchain in Finance” that blockchain technology offers significant improvements for the financial system like cheaper and faster transactions but recent events, like the collapse of FTX, have shown there is a dire need for regulation in the sector.

The GAO said that Congress must focus on creating new legislation to address the consumer protection and financial stability issues stemming from the lack of oversight of the crypto industry.

Federal regulators lack a comprehensive framework and a “coordination mechanism” to supervise the sector effectively. According to the report:

“A formal coordination mechanism for addressing blockchain-related risks, which could establish processes or time frames for responding to risks, could help federal financial regulators collectively identify risks and develop timely and appropriate responses.”

Spot markets

The report said that recent months have shown that spot markets for cryptocurrencies that are not considered securities are rife with fraudulent activity and trading manipulation since no regulator has the authority to supervise them.

According to the report, platforms that trade crypto-asset securities are currently subject to registration and regulation under securities laws, which has been sufficient to combat fraud and manipulation in those markets.

Platforms that facilitate trading of crypto-assets that are not securities need to be treated similarly and brought into the regulatory net via new legislation.

The report said:

“By providing for more comprehensive oversight of these platforms, Congress could better ensure users’ protection from unfair and manipulative trading practices.”

Stablecoins

The GAO said that stablecoins have become a significant part of the crypto ecosystem and could eventually pose risks to financial stability if left unchecked by regulators.

Stablecoins are meant to be backed by reserve assets to maintain their peg to the dollar. However, the watchdog said there are no “uniform standards” for reserve levels, risk or disclosures, with many issuers sharing different levels of information about their reserves.

According to the report, stablecoins must follow standardized rules for reserve levels and public disclosures as they become more integrated into the financial system.

Additionally, the watchdog recommended creating a legal framework for redemption rights related to stablecoins.