The FSOC warns that stablecoins pose a risk to stability because they don’t follow management standards
The FSOC stated that the absence of comprehensive protection renders stablecoins susceptible to systemic disruptions, which could potentially compromise the stability of the broader financial system.
The United States Financial Services Oversight Council (FSOC) has issued a warning regarding the potential hazards associated with stablecoins, which are a result of the absence of adequate risk management standards.
The FSOC stated in its annual report, which was published on December 6, that stablecoins are susceptible to systemic disruptions that could potentially compromise the stability of the broader financial system due to the absence of robust protection.
The FSOC stated that stablecoins are still a potential risk to financial stability due to their acute vulnerability to runs in the absence of appropriate risk management standards.
The FSOC asserted that the stablecoin market is highly concentrated, with a single firm controlling approximately 70% of the sector’s total market value.
The current value of the stablecoin market is $205.48 billion. The market capitalization of Tether (USDT), the foremost stablecoin, is $136.8 billion, with a 66.3% share, as per CoinMarketCap data.
The FSOC did not identify any particular firm; however, it cautioned that the crypto market could be disrupted and the effects could potentially extend to traditional financial systems if a single issuer continues to consolidate its market dominance.
TerraUSD (UST) collapsed in May 2022, prompting the council’s fears. Within days, the algorithmic stablecoin’s linkage to the US dollar was lost, resulting in a plummet to $0.09 after $2 billion was unstaked. This event triggered a pervasive loss across the crypto ecosystem.
The FSOC criticized stablecoin issuers for operating outside of a comprehensive federal regulatory framework, which exacerbates the risks.
Although some issuers are subject to state-level supervision that necessitates periodic reporting, a significant number of them offer only limited transparency regarding their reserve management practices and holdings.
The FSOC contends that the absence of verifiable information exacerbates the risk of fraud and impedes market discipline.
The FSOC has encouraged Congress to implement legislation that establishes a rigorous federal framework for stablecoin issuers in order to mitigate these risks.
The proposed framework would address critical areas, including market integrity, investor protections, payment system risks, and run risk.
“The Council suggests that Congress enact legislation to establish a comprehensive federal prudential framework for stablecoin issuers,” the report stated.
In the absence of legislative action, the FSOC stated that it would investigate alternative measures to mitigate the risks associated with stablecoins.
Meanwhile, Paulo Ardoino, the CEO of Tether, has voiced apprehension regarding the upcoming Markets in Crypto-Assets (MiCA) regulations in Europe.
Stablecoin issuers are required to maintain a minimum of 60% of their reserves in European institutions in accordance with MiCA.
Ardoino expressed concern that this requirement could introduce systemic risks, as banks typically lend up to 90% of their reserves.
Notably, the stablecoin market is still unrestricted in the United States. Senators Cynthia Lummis and Kirsten Gillibrand recently collaborated to introduce a new measure that is designed to regulate stablecoins.
The proposed legislation would impose reserve and operational requirements on payment stablecoin issuers, which would include the establishment of subsidiaries that are exclusively responsible for the issuance of stablecoins.
The bill defines payment stablecoins as digital assets that are pegged to the U.S. dollar and are intended for use as a means of payment or settlement.
Also Read: Seantor Warns of Crypto-Related Endangerments to the Financial Stability of the United States
