FSOC Warns Stablecoins Pose Stability Risks due to Lack of Management Standards

The United States Financial Services Oversight Council (FSOC) has raised alarms over the potential risks posed by stablecoins due to inadequate risk management standards.

In its annual report released on December 6, the FSOC said that the lack of robust protection leaves stablecoins vulnerable to systemic disruptions that could jeopardize broader financial stability.

“Stablecoins continue to represent a potential risk to financial stability because they are acutely vulnerable to runs absent appropriate risk management standards,” the FSOC stated.

Stablecoin Market is Heavily Concentrated

The FSOC claimed that the market for stablecoins is heavily concentrated, with a single firm controlling approximately 70% of the sector’s total market value.

Currently, the stablecoin market is valued at $205.48 billion.

Tether (USDT), the leading stablecoin, accounts for 66.3% of this, with a market capitalization of $136.8 billion, according to CoinMarketCap data.

While the FSOC did not name any specific firm, it warned that further concentration of market dominance by a single issuer could disrupt the crypto market and potentially ripple into traditional financial systems.

The council’s concerns come following the collapse of TerraUSD (UST) in May 2022.

The algorithmic stablecoin lost its peg to the US dollar within days, plummeting to $0.09 after $2 billion was unstaked, triggering widespread losses across the crypto ecosystem.

The FSOC criticized stablecoin issuers for operating outside a comprehensive federal regulatory framework, which exacerbates the risks.

While some issuers are subject to state-level oversight requiring periodic reporting, many provide limited transparency about their holdings and reserve management practices.

The lack of verifiable information, according to the FSOC, hampers market discipline and heightens the risk of fraud.

To mitigate these risks, the FSOC has urged Congress to enact legislation that establishes a robust federal framework for stablecoin issuers.

The proposed framework would address critical areas such as run risk, payment system risks, market integrity, and investor protections.

“The Council recommends that Congress pass legislation creating a comprehensive federal prudential framework for stablecoin issuers,” the report stated.

FSOC to Explore Steps to Address Stablecoin Risks

In the absence of legislative action, the FSOC indicated it would explore other steps to address the risks associated with stablecoins.

Meanwhile, Tether’s CEO Paulo Ardoino has expressed concerns about Europe’s forthcoming Markets in Crypto-Assets (MiCA) regulations.

Under MiCA, stablecoin issuers must hold at least 60% of their reserves in European banks.

Ardoino cautioned that this requirement could introduce systemic risks, as banks typically loan up to 90% of their reserves.

Notably, the stablecoin market remains unregulated in the United States.

Just recently, Senators Cynthia Lummis and Kirsten Gillibrand joined forces to propose a new bill aimed at regulating stablecoins .

Under the proposed legislation, payment stablecoin issuers would be subject to reserve and operational requirements, including the creation of subsidiaries dedicated to issuing stablecoins.

The bill defines payment stablecoins as digital assets pegged to the U.S. dollar that are intended for use as a means of payment or settlement.