The Financial Services Oversight Council (FSOC) has discussed the threat of stablecoins to financial stability. According to its annual report published on December 6, the council highlighted that the assets lack the needed risk management standard which could open them to certain risks in the market. FSOC notes that these risks pose direct threats to financial stability.
In the report, FSOC noted that these potential risks will remain because stablecoins cannot adopt the important risk management standards. Aside from this, the body also blamed the lack of legislative oversight, which could have helped to check these risks. FSOC, therefore, called on federal legislators to create a regulatory framework that will curb these risks. The body also highlighted the need for extending regulations into the wider crypto market, stating that it will help their integration with the traditional market and institutional interest.
FSOC reiterates its concerns about the stablecoin market
Over the last few years, FSOC has always shown displeasure at the way the stablecoin market is heavily concentrated. The body, in its current report, highlighted that only a single entity controls about 70% of the total market value of the sector. According to data from CoinMarketCap, the entire market capitalization of the stablecoin sector is roughly over $205 billion, with Tether holding a larger chunk of $136 billion, which amounts to 66.3% of the entire figure.
Although the report failed to finger any firm, it highlighted the consequences of a single firm’s market dominance. It highlighted that if this happens, the firm’s potential failure could cause disruptions to the crypto industry, causing related effects in the traditional finance industry. For some months now, investors have been uneasy about the lack of third-party audits in Tether’s activities. While investor concerns continue to mount, there are fears that the firm could face liquidity issues like FTX in the future.
In 2022, stablecoin TerraUSD (UST) encountered a mishap after it unstacked $2 billion, leading to its unpegging from the US dollar. The token’s value, which was supposed to be 1:1 with the dollar, dropped to $0.09. FSOC claimed that while most stablecoins are required to submit to regular checks by state regulators, most of them provide small verifiable information about their operations and reserve management practices. The body claims that the practice increases the likelihood of fraud and poses a challenge to market discipline.
FSOC sees a stablecoin law as the only way out
In devising a way out of this predicament, the FSOC suggested that the government needs to come up with a federal regulation. “The Council recommends that Congress pass legislation creating a comprehensive federal prudential framework for stablecoin issuers to address run risk, payment system risks, market integrity, and investor and consumer protections,” the council said. However, it notes that if no action is taken it would consider taking one of its own.
Meanwhile, FSOC also discussed the increased crypto integration in the traditional finance sector, drumming up the need for more regulatory oversight. It claimed that while the crypto’s market value at $2 trillion is still modest compared to traditional finance, products like ETFs have increased investor accessibility. The value of exchange-traded products has pushed into the $80 billion region, following their approvals this year.
The FSOC also talked about the increased risk that the growth of ETFs poses to investors in the industry. The report revealed several regulatory lapses yet to be tackled in the spot market, including fraud and market manipulation. To remove these risks, FSOC wants to grant federal regulators power to oversee crypto products that are not securities. Without removing the transformative potential of these assets, FSOC wants a balanced approach that will safeguard investors and support innovation.
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