Digital assets saw great volatility in the US in the previous year, according to an analysis from the Financial Stability Oversight Council (FSOC)
The FSOC released its 2019 annual report on the state of the economy and digital currency has grown enough to warrant its own section.
“The market capitalization of digital assets, such as Bitcoin, Ethereum, XRP, and Litecoin, has increased in recent years and has been highly volatile.” The report stated. “Digital assets trading data is sparse and may be unreliable. CoinMarketCap estimated that after reaching $800 billion in early 2018, the market capitalization of digital assets declined to $209 billion by the end of September 2019. Stablecoins—digital assets designed to maintain a stable value relative to another asset (typically a unit of currency or commodity) or a basket of assets—grew in market capitalization in 2019.”
The report continued by noting that the technology may have effects far beyond merely digital currency, “Many digital assets are enabled by blockchains or other distributed ledger technologies. Such systems share data across a network, creating identical copies of their ledger that are then often stored at and synchronized across multiple locations. Distributed ledger technology may have applications that extend well beyond the simple transfer of value. In recent years, an increasing number of financial institutions have initiated proof of concept projects to evaluate the potential for applications of distributed ledger technology in areas such as interbank and intrabank settlement, derivatives processing, repo clearing, and trade finance. The ultimate success of the technology, including applications in the financial sector, is not yet certain. Some early efforts have not resulted in the anticipated efficiency gains and other promised benefits, and as a result, have been scaled back, refocused, or abandoned.”
The FSOC released the report in conjunction with appearances on Capitol Hill by USDOT Secretary Steve Mnuchin.
Mnuchin appeared in front of the US House Financial Services Committee on Thursday December 5.
In his opening written statement, Mnuchin touted the strength of the US economy, “Since the publication of the Council’s last annual report in December 2018, the U.S. economy has continued to perform extremely well. Economic growth in the United States far exceeds that of our G7 trading partners, and unemployment rates are near a 50-year low, including unemployment levels at or near all-time lows for African Americans, Hispanic Americans, Asian Americans, and women. Wages are rising faster for hardworking families; corporate and consumer delinquency and default rates are low; and financial conditions remain stable.”
Digital currency was not the only trading asset which the report covered.
Of derivatives, the report noted, “Equity market volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), peaked in early and late 2018 with the sell-offs in the U.S. stock market. Volatility in crude oil rose to its highest level in the past year as prices contracted in the late fall of 2018. Interest rate volatility, as measured by the 10- year U.S. Treasury Volatility Index (TYVIX), hit an all-time low of 3.16 in September 2018. Since then, interest rate volatility rose during periods of increased economic uncertainty, and in August 2019, the TYVIX reached its highest level since 2016. At the same time, speculative traders have increased their directional positions in rates futures products, and in August 2019, leveraged funds held record net short positions in longer-term Treasury futures.”
The FSOC was, “was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act),” according to the report.
The FSOC includes the Secretary of the Treasury, the Fed Chair, the head of the Office of Comptroller of Currency, and the Chairs of the Securities and Exchange Commission (SEC) and Commodities Futures Trading Commission (CFTC).
It is tasked with three functions. Here is from the report.
- To identify risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected bank holding companies or nonbank financial companies, or that could arise outside the financial services marketplace.
- To promote market discipline, by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the U.S. government will shield them from losses in the event of failure.
- To respond to emerging threats to the stability of the U.S. financial system.