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In its 2024 annual report, the Financial Stability Oversight Council (FSOC) raised concerns about the potential risks stablecoins pose to the financial system, citing vulnerabilities tied to insufficient risk management.
The report emphasized that stablecoins, which are designed to maintain a fixed value relative to fiat currencies, remain “acutely vulnerable to runs” without robust risk management standards. This ongoing vulnerability, according to the FSOC, could escalate into a broader financial stability issue.
Concentration in the Stablecoin Market
The FSOC highlighted the highly concentrated nature of the stablecoin market, with one issuer dominating the space. As of December 6, the market capitalization of stablecoins stood at approximately $205.48 billion, with Tether (USDT)accounting for 66.3%—or $136.8 billion—according to CoinMarketCap.
The council warned that this concentration increases systemic risk:
“If that firm’s market dominance continues to expand, its failure could disrupt the crypto-asset market and create knock-on effects for the traditional financial system.”
The lack of third-party audits by dominant players, such as Tether, has also fueled concerns about liquidity crises similar to the collapse of FTX.
Regulatory Gaps and Risks
The FSOC underscored that many stablecoin issuers operate outside a comprehensive federal prudential framework, with only a few subjected to state-level supervision. These issuers often provide limited transparency regarding reserve management and holdings, raising the risks of fraud and undermining market discipline.
The report also referenced the collapse of TerraUSD (UST) in May 2022, which saw the algorithmic stablecoin plummet from its 1:1 peg to the US dollar to just $0.09 within days after $2 billion was unstaked. This event underscored the potential for catastrophic market disruption.
Call for Federal Legislation
To mitigate these risks, the FSOC urged Congress to enact legislation establishing a comprehensive federal regulatory framework for stablecoin issuers. This framework would address critical issues, including:
- Run risks
- Payment system vulnerabilities
- Market integrity
- Investor and consumer protections
The FSOC warned it would explore additional measures if Congress fails to act promptly.
Concerns Over European Regulation
The report also touched on international developments, including Europe’s upcoming Markets in Crypto-Assets (MiCA)framework. Under MiCA, stablecoin issuers will be required to hold at least 60% of reserve assets in European banks.
Paolo Ardoino, CEO of Tether, expressed concerns that such requirements could introduce systemic risks, noting that banks often lend up to 90% of their reserves. This could create unintended vulnerabilities for stablecoin issuers and the broader crypto ecosystem.
Conclusion
The FSOC’s findings highlight the urgent need for regulatory clarity in the stablecoin market to safeguard both the crypto and traditional financial systems. With increasing market adoption and evolving international regulations, the stability and oversight of stablecoins remain critical to mitigating systemic risks.
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