The United States Financial Services Oversight Council (FSOC) has expressed serious concerns over the systemic risks posed by stablecoins due to insufficient risk management practices. In its annual report released on December 6, the FSOC emphasized that without appropriate safeguards, stablecoins remain highly susceptible to financial instability, potentially jeopardizing the broader financial ecosystem.
“Stablecoins continue to represent a potential risk to financial stability because they are acutely vulnerable to runs absent appropriate risk management standards,” the FSOC warned.
Stablecoin Market Dominance and Concentration
The FSOC highlighted the alarming concentration of market power within the stablecoin sector, noting that a single issuer controls approximately 70% of the market’s total value.
As of now, the global stablecoin market is valued at $205.48 billion. Tether (USDT), the dominant stablecoin, accounts for 66.3% of this, with a market capitalization of $136.8 billion, according to CoinMarketCap.
Although the FSOC did not name specific firms, it cautioned that further market consolidation by a single issuer could amplify risks within the crypto market and potentially spill over into traditional financial systems.
These warnings are underscored by the 2022 collapse of TerraUSD (UST), an algorithmic stablecoin that lost its peg to the U.S. dollar, triggering widespread financial losses.
Regulatory Gaps and Transparency Issues
The FSOC criticized the absence of a comprehensive federal regulatory framework for stablecoin issuers. It noted that while some issuers comply with state-level oversight, this patchwork approach fails to address broader concerns, including transparency and reserve management.
Stablecoin issuers often provide limited disclosure about their reserves, making it difficult to assess the stability of their pegged values. The FSOC noted that this lack of verifiable information undermines market discipline and increases the risk of fraud and financial mismanagement.
Legislative Recommendations
To mitigate these risks, the FSOC has called on Congress to pass legislation that would establish a robust federal framework for stablecoin regulation. Key areas to address include:
- Run Risk: Ensuring issuers have sufficient reserves to prevent destabilizing withdrawals.
- Payment System Integrity: Mitigating risks to the broader payment infrastructure.
- Market Transparency: Requiring detailed disclosures on reserves and holdings.
- Investor Protections: Establishing safeguards for consumers and institutions.
“The Council recommends that Congress pass legislation creating a comprehensive federal prudential framework for stablecoin issuers,” the FSOC stated in its report.
FSOC and Global Regulatory Perspectives
In the absence of legislative action, the FSOC indicated it might pursue alternative measures to address stablecoin risks.
Meanwhile, Tether CEO Paolo Ardoino raised concerns over Europe’s impending Markets in Crypto-Assets (MiCA) regulations, which would require stablecoin issuers to hold at least 60% of their reserves in European banks. Ardoino argued that this could introduce systemic risks, as banks typically loan out up to 90% of their reserves, creating potential liquidity challenges.
U.S. Efforts to Regulate Stablecoins
The United States remains without comprehensive stablecoin regulations. However, legislative efforts are gaining traction. Senators Cynthia Lummis and Kirsten Gillibrand have proposed a bill that would require payment stablecoin issuers to adhere to strict reserve and operational requirements.
The bill defines payment stablecoins as digital assets pegged to the U.S. dollar and intended for use as a means of payment or settlement. Among its provisions, issuers would need to establish dedicated subsidiaries for stablecoin operations and maintain robust reserve practices.
Implications
The FSOC’s report underscores the critical need for comprehensive regulation of stablecoins to address their vulnerabilities and protect both the crypto and traditional financial markets. With stablecoins playing an increasingly vital role in global finance, their systemic risks must be managed proactively to prevent future crises like the TerraUSD collapse.
The call for legislative action aligns with growing concerns worldwide, emphasizing the importance of creating robust, transparent, and enforceable regulatory frameworks.
