The U.S. Financial Services Oversight Council (FSOC) has flagged significant risks posed by stablecoins, citing inadequate risk management standards and regulatory oversight in its annual report released on December 6.
Stablecoins Pose Financial Stability Risks
The FSOC emphasized that stablecoins are vulnerable to systemic disruptions, which could spill over into broader financial systems.
“Stablecoins continue to represent a potential risk to financial stability because they are acutely vulnerable to runs absent appropriate risk management standards,” the report stated.
The warning highlights the urgent need for comprehensive regulations to address the risks posed by these digital assets.
Market Concentration Raises Red Flags
The FSOC noted that the stablecoin market, valued at $205.48 billion, is heavily concentrated, with a single issuer controlling 70% of the market value.
According to CoinMarketCap, Tether (USDT) dominates the sector with a 66.3% market share, boasting a market capitalization of $136.8 billion.
While the FSOC did not specifically name Tether, it warned that increasing market concentration could amplify vulnerabilities and destabilize both the crypto and traditional financial markets.
This caution follows the collapse of TerraUSD (UST) in May 2022, where the algorithmic stablecoin lost its dollar peg and plummeted to $0.09, triggering widespread losses across the crypto ecosystem.
Lack of Transparency and Federal Oversight
The FSOC criticized stablecoin issuers for their limited transparency regarding reserves and risk management practices. While some are subject to state-level oversight, the absence of a federal regulatory framework leaves the market exposed to fraud and operational risks.
To mitigate these issues, the FSOC has recommended that Congress enact a comprehensive federal prudential framework for stablecoin issuers. This framework would address:
- Run risk
- Payment system vulnerabilities
- Market integrity
- Investor protections
“The Council recommends that Congress pass legislation creating a comprehensive federal prudential framework for stablecoin issuers,” the report asserted.
FSOC Explores Alternative Measures
If legislative action is delayed, the FSOC indicated it may pursue alternative steps to manage stablecoin-related risks.
Meanwhile, Tether CEO Paulo Ardoino has raised concerns about Europe’s upcoming Markets in Crypto-Assets (MiCA) regulations, which require stablecoin issuers to hold at least 60% of reserves in European banks. Ardoino warned this could increase systemic risks, as banks often loan up to 90% of their reserves.
Proposed Legislation to Regulate U.S. Stablecoin Market
The stablecoin market remains largely unregulated in the United States. However, Senators Cynthia Lummis and Kirsten Gillibrand have introduced a bill proposing stricter regulations for stablecoin issuers.
Under the legislation, issuers would need to meet reserve and operational requirements, including the creation of subsidiaries dedicated to stablecoin issuance.
The bill defines payment stablecoins as digital assets pegged to the U.S. dollar, intended for use as a payment or settlement method.
As regulatory pressure mounts, the FSOC’s report underscores the importance of developing robust frameworks to ensure the safe and sustainable growth of the stablecoin sector.
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