All blockchain-based financial products face challenges, warned a Government Accountability Office report published today.
“These include risks to users and to the wider financial system due to a current lack of consumer protection and the ability to use technology to facilitate illegal activity,” the study.
Speaking of consumer protection risks, the report pointed out that federal deposit insurance may not cover losses on cryptocurrency balances, and consumers may not be aware of the associated risks if cryptocurrency exchanges cryptocurrency were closing their doors.
Additionally, the study indicates that funds can be stolen through fraudulent token sales, using fake business plans, which criminals have used to defraud consumers of billions of dollars in cryptocurrency.
The stability of the financial system could be put at risk, notes the study, citing the identification by the International Organization of Securities Commissions (IOSCO) of potential risks to the integrity of the market of crypto-asset trading platforms such as one of its top priorities.
IOSCO said risks include where a trading platform gives preferential treatment to certain users and offers advice to clients related to an asset in which the trading platform may have an interest.
Other groups have also warned that cryptocurrencies could pose dangers to financial stability if they become a larger part of financial markets.
The GAO study went on to highlight that blockchain financial products can pose challenges for law enforcement and regulators, from drug trafficking to money laundering to terrorist financing.
On the regulatory front, the report says it’s unclear to what extent various US jurisdictions recognize smart contracts as legally binding contracts and who would be liable in the event of a dispute.
Looking at opportunities for improvement, the study said clarity in US oversight could help prevent US-based blockchain companies from moving to other countries, referring to regulatory sandboxes as a possibility.
Additionally, the study pointed out that coordination among regulators could promote safety and soundness, consumer protection, and help combat illicit activities in blockchain-related commerce.