The United States Government Accountability Office (GAO), an oversight agency of Congress, has released a report it completed in June on the regulatory framework for the use of blockchain in finance.

The 77-page report was requested by Reps. Maxine Waters and Stephen Lynch before the midterm elections, when they were chair and member, respectively, of the House Financial Services Committee. Unsurprisingly, the report found that more regulation is needed. The agency has a framework for evaluating regulatory reform proposals developed in 2009.

The report singled out crypto-asset trading platforms and stablecoins as products that lack regulation, but examined the policies and activities of regulators without straying into the “turf war” controversies surrounding the definition of securities. It therefore identified spot markets for unsecured crypto-assets as the center of the regulatory loophole, stating:

“By designating a federal regulator to provide comprehensive federal oversight of spot markets for unsecured cryptoassets, Congress could mitigate risks to financial stability and better ensure that platform users receive protection.”

Traditional assets in this category are heavily regulated, the report said. Cryptocurrency assets are subject to limited oversight, such as by the Treasury Department’s Financial Crimes Enforcement Network and through state money transmitter licenses.

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Stablecoins need regulation regarding the composition of their reserves, auditing and disclosure of information and redemption rights. The report says current regulation is a hodgepodge of measures from the Securities and Exchange Commission, the Commodity Futures Trading Commission and says it does not constitute “consistent and comprehensive prudential regulation and oversight.”

Decentralized finance can be regulated in inverse proportion to its level of decentralization, the GAO said. When an ecosystem is fully decentralized, there is no individual who can be identified as responsible for its development, operation or management. It may also involve multiple regulatory jurisdictions in its operations.

Turning to turf war issues, the report identified the need for greater coordination between regulators and noted complaints from market participants about regulators’ slow response to market innovation. The report states that the Treasury Department’s Financial Stability Oversight Board has been tasked with leading efforts to create a unified approach to overseeing crypto assets under the March 2022 Executive Order to Ensure Responsible Development of Digital Assets.

The report recommended that the seven relevant regulatory agencies “jointly establish or modify an existing formal coordination mechanism […] for collectively identifying the risks posed by blockchain-related products and services and formulating a timely regulatory response.” further:

“This mechanism could include formal planning documents that set out the frequency of meetings and processes for identifying and responding to risks within agreed timeframes.”

The National Credit Union Administration agreed with the finding, while others disagreed or disagreed. The GAO is the nation’s top auditor. Although its recommendations are not legally binding, the century-old agency’s findings carry considerable moral weight.

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