The United States Financial Services Oversight Council (FSOC) has issued warnings regarding the potential risks of stablecoins due to insufficient risk management practices. In its annual report, released on December 6, the FSOC highlighted that the lack of robust protections makes stablecoins vulnerable to systemic disruptions, which could threaten broader financial stability.
Stablecoins and Their Potential Financial Stability Risks
The FSOC emphasized that stablecoins remain a significant risk to financial stability because they are highly susceptible to runs without proper risk management. The council’s report stated, “Stablecoins continue to represent a potential risk to financial stability because they are acutely vulnerable to runs absent appropriate risk management standards.”
Market Concentration and Its Impact
The stablecoin market is notably concentrated, with one company controlling about 70% of the total market value, according to the FSOC. As of now, the stablecoin market is valued at $205.48 billion. Tether (USDT), the largest stablecoin, represents 66.3% of this market with a $136.8 billion market cap, as per CoinMarketCap data. While the FSOC did not specifically identify any firms, it expressed concern that further consolidation of market power by a single issuer could disrupt the crypto industry and spill over into traditional financial systems.
Impact of TerraUSD Collapse
The FSOC’s concerns were amplified by the collapse of TerraUSD (UST) in May 2022. This algorithmic stablecoin lost its peg to the US dollar after a mass withdrawal of $2 billion, which led to it plummeting to $0.09 and triggering widespread losses across the crypto market.
Calls for Stronger Federal Regulation
The FSOC criticized the lack of a comprehensive federal regulatory framework for stablecoin issuers. While some issuers are regulated at the state level, many operate with limited transparency regarding their reserves and holdings. The FSOC argued that this opacity hinders market discipline and increases the likelihood of fraud.
To address these risks, the FSOC has urged Congress to create a strong federal framework for regulating stablecoins. The proposed legislation would focus on addressing run risks, payment system risks, market integrity, and investor protections.
FSOC’s Plans to Tackle Stablecoin Challenges
In the absence of new legislation, the FSOC signaled that it would explore other methods to manage the risks associated with stablecoins. Tether’s CEO, Paulo Ardoino, raised concerns about Europe’s upcoming Markets in Crypto-Assets (MiCA) regulations. Under MiCA, stablecoin issuers must hold at least 60% of their reserves in European banks. Ardoino warned that this requirement could introduce systemic risks since banks often lend up to 90% of their reserves.
New Stablecoin Legislation Proposal
In the United States, stablecoin regulation remains largely unaddressed. Recently, Senators Cynthia Lummis and Kirsten Gillibrand introduced a new bill to regulate stablecoins. This legislation would impose reserve and operational requirements on payment stablecoin issuers, including the creation of subsidiaries specifically for issuing stablecoins. The bill defines payment stablecoins as digital assets pegged to the U.S. dollar and meant for use in payments or settlements
The post FSOC Warns Stablecoins Pose Stability Risks due to Lack of Management Standards appeared first on Cryptonews.
