- According to the FSOC, stablecoins are susceptible to systemic disturbances that could endanger wider financial stability because they lack strong protection.
Due to insufficient risk management guidelines, the US Financial Services Oversight Council (FSOC) has expressed concern about the possible dangers that stablecoins may bring.
The FSOC stated in its annual report, which was made public on December 6, that stablecoins are susceptible to systemic disturbances that could endanger the stability of the financial system as a whole since they lack strong protection.
Due to their extreme vulnerability to runs in the absence of suitable risk management guidelines, stablecoins continue to pose a threat to financial stability.
The market for stablecoins is highly concentrated
According to the FSOC, there is significant concentration in the stablecoin market, with one company holding almost 70% of the industry’s total market value.
The market for stablecoins is currently worth $205.48 billion.
According to CoinMarketCap data, Tether (USDT), the top stablecoin, makes up 66.3% of this with a market valuation of $136.8 billion.
The FSOC cautioned that additional market dominance concentration by a single issuer could upset the cryptocurrency market and perhaps have an impact on conventional financial systems, even if it did not specifically mention any company.
The council’s worries stem from TerraUSD’s (UST) May 2022 demise.
After two billion dollars were unstaked, the algorithmic stablecoin lost its peg to the US dollar in a matter of days, falling to $0.09 and causing massive losses throughout the cryptocurrency ecosystem.
Stablecoin issuers have come under fire from the FSOC for operating outside of a thorough federal regulatory framework, which increases the risks.
Many issuers offer just a limited amount of transparency regarding their holdings and reserve management procedures, even though some are subject to state-level oversight that requires frequent reporting.
The FSOC claims that the absence of reliable information increases the danger of fraud and undermines market discipline.
The FSOC has called on Congress to pass legislation that creates a strong government framework for stablecoin issuers in order to reduce these risks.
Important topics including run risk, payment system hazards, market integrity, and investor rights would all be covered under the suggested framework.
The Council suggests that Congress enact laws that establish a thorough federal prudential framework for issuers of stablecoins.
FSOC to Investigate Countermeasures for Stablecoin Risks
The FSOC stated that it will look at alternative measures to mitigate the dangers related to stablecoins in the event that legislation was not taken.
Paulo Ardoino, the CEO of Tether, has voiced worries on the upcoming Markets in Crypto-Assets (MiCA) laws in Europe.
Stablecoin issuers are required by MiCA to maintain a minimum of 60% of their reserves with European banks.
Considering that banks normally lend up to 90% of their reserves, Ardoino warned that this rule would create systemic problems.
Interestingly, the US stablecoin market is still uncontrolled.
Senators Kirsten Gillibrand and Cynthia Lummis have teamed up to put up a new measure that would regulate stablecoins.
The proposed law would impose operating and reserve requirements on payment stablecoin issuers, including the establishment of stablecoin-issuing companies.
According to the bill, payment stablecoins are digital assets that are based on the US dollar and designed to be used as a settlement or payment method.
Disclaimer : This article was created for informational purposes only and should not be taken as investment advice. An asset’s past performance does not predict its future returns. Before making an investment, please conduct your own research, as digital assets like cryptocurrencies are highly risky and volatile financial instruments.
