The US Treasury Division desires regulators to concentrate on “potential dangers” in digital asset innovation

The U.S. Treasury Department wants state and federal regulators to closely monitor digital asset innovation.

According to a report released Thursday by the Financial Stability Oversight Council, digital assets are “a particularly good example” of the benefits and potential risks of innovation.

The report highlighted the ambitions of nations around the world in their experiments with Central Bank (CBDC) digital currencies to "improve the global standing of their own currencies and enable faster payments".

"Financial innovation offers significant benefits to consumers," the report said. However, the report also suggested that stable coins could be widespread as a means of payment as it could upset the balance of the current financial system and warrant "stronger regulatory scrutiny".

The Council's role is to identify risks to US financial stability, promote market discipline, and respond to threats to the US financial system. The council consists of 10 voting members and five non-voting members who, according to the department's website, bring together the expertise of federal financial regulators, state regulators, and an independent insurance expert appointed by the U.S. President.

Increasingly, e-commerce companies that offer financial services like Square and Paypal may seek to compete directly with incumbent financial services providers. "Their market presence could grow significantly," the report said. That these companies are not regulated in the same way that "incumbent financial service providers have to comply" is a matter of concern, the council said.

It was also suggested that financial stability could be disrupted if financial institutions outsource "critical services" to third-party providers where operational disruptions could disrupt the activities of "multiple financial institutions or financial markets".

For this reason, the Council recommended that regulators take a “proactive” approach to identifying new financial products and services and encourage “relevant authorities” to assess the impact of these services on the status quo.

"The Council encourages ongoing coordination between federal and state regulators to identify and address potential risks arising from such innovations," the report said.

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