It is no surprise regulators dislike bitcoin, since it is beyond their control and there is no centralized authority overseeing it. In its annual 2016 report issued on Tuesday, the Financial Stability Oversight Council (FSOC) expressed concerns about increased usage of digital currencies such as bitcoin, which may pose threats to financial stability.
Created back in 2009, Bitcoin is the first cryptocurrency, which gained favor as an alternative to currencies, which are managed by central banks on behalf of governments. Unlike those currencies, Bitcoin functions as a decentralized database for transactions without governing institutions. So people can exchange value on a peer-to-peer basis, without the need of any financial intermediary.
The FSOC`s report defines bitcoin and cryptocurrencies as distributed ledger technology, and reviews the benefits of it: such systems allow market participants to manage many types of transactions without the direct participation of trusted third parties; they can be designed to be broadly accessible and verifiable, so as to provide a valuable mechanism to enhance market transparency, mitigate risk and improve resilience in financial networks, etc.
According to the regulator, however, market participants have limited experience working with distributed ledgers, so it is possible operational vulnerabilities connected with such systems might not be apparent until deployed at scale.
What is more, like most new technologies, cryptocurrencies could be vulnerable to fraud and pose certain risks and uncertainties, which market participants and financial regulators will need to monitor, the regulator added.
This probably implies that US authorities are planning to tighten up cryptocurrency regulation. And the regulation matter with bitcoin us quite tricky – lawmakers around the world are wondering whether the time has come to regulate this emerging, yet fast evolving technology and what would be the outcome, as it seems likely such an act to hinder the growth and innovation of blockchain technology.
A number or central banks recently have looked into the blockchain. Earlier this month the Bank of Canada tested blockchain technology for possible use in interbank payments. Russia’s central bank also formed a committee to explore the technology’s opportunities, even though it is generally against bitcoin. Meanwhile, Japan is making the first steps towards “legalizing” the cryptocurrencies, EU’s European Securities and Markets Authority (ESMA) is looking into distributed ledger technology, and real blockhain payments are tested in the UK.
Established by the Dodd-Frank Act, the FSOC is entrusted with important tasks: to promote financial market discipline, to identify risks to the financial stability of the United States and act on them. The FSOC includes the Federal Reserve, the Securities and Exchange Commission and the Treasury Department.