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Fed and SEC need more consistent blockchain coordination, GAO says
Coordination between the two financial regulators to take on the risks posed by blockchain technology has lacked consistency, a congressional watchdog said Monday.
In a pair of priority open recommendations, the Government Accountability Office said that Federal Reserve and the Securities and Exchange Commission have succeeded in establishing coordination mechanisms with other federal regulators and financial working groups to identify risks posed by blockchain-related products and services. But neither the Fed nor the SEC has “regularly” called these bodies since the GAO issued its recommendation in August 2023.
The lack of cadence in convening these groups, the GAO said, means that both agencies are unable “to specifically identify the full range of risks and regulatory challenges of existing and emerging blockchain products and services and provide a response timely to any unaddressed risks”.
The Fed, which neither agreed nor disagreed with the GAO’s recommendation, said it “regularly engages with other federal financial regulators on emerging risks posed by blockchain-related products and services.” The banking regulator noted that it participates in sharing information on identifying blockchain-related risks with other regulators in the Digital Asset Working Group, but the GAO is pushing for “planning processes to identify and address such risks” within that group.
“Full implementation of this priority recommendation would help the Federal Reserve and other financial regulators collectively identify the risks posed by blockchain-related products and services and develop and implement a regulatory response in a timely manner,” the GAO said.
The SEC, meanwhile, told the GAO that it is working to identify cryptocurrency-related risks in the agency’s work with the Financial Stability Oversight Council, the President’s Working Group on Financial Markets, and certain international bodies. The FSOC “has established a coordination mechanism” through the Digital Assets Working Group, the SEC reported to the GAO, adding that the working group “meets regularly and has discussed a variety of topics, including regulatory developments, regulatory , risks, data collection and market developments”.
The GAO called the Digital Asset Working Group “a positive step,” but urged the SEC to embrace the planning documents.
“Such planning documents could include (1) objectives and frequency of meetings; (2) processes to identify the full range of risks and regulatory challenges regarding blockchain-related products and services (not just those related to financial stability); and (3) processes to respond to these risks and challenges within agreed-upon timeframes,” the GAO said.
In addition to blockchain, the GAO reiterated a second priority recommendation to the Federal Reserve, originally delivered in 2019. The watchdog wanted the Fed, along with other banking regulators and the Consumer Financial Protection Bureau, to finalize “a written notice giving banks guidance specifications on the appropriate use of alternative data in the underwriting process when working with fintech lenders.”
A year ago the Fed worked with the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency to issue interagency guidance on third-party risk management, but the GAO said the guidance is not specific.
The guidance “does not include specific guidance for banks interacting with fintech lenders on the appropriate use of alternative data in the underwriting process,” the GAO wrote. “Rather, the guidance applies broadly across all topics and third-party relationships. As a result, it does not address specific topics, such as the use of alternative data, or specific types of third-party relationships, such as relationships with fintech companies.”
Written by Matt Bracken
Matt Bracken is the managing editor of FedScoop and CyberScoop, overseeing coverage of the federal government’s technology and cybersecurity policy. Before joining Scoop News Group in 2023, Matt was a senior editor at Morning Consult, covering data-driven coverage of technology, finance, health and energy. He previously worked in various editorial roles at the Baltimore Sun and the Arizona Daily Star. You can reach him at matt.bracken@scoopnewsgroup.com.