Stablecoins’ lack of solid risk management standards exposes them to ongoing risks that could also put financial stability in danger, according to the United States Financial Services Oversight Council (FSOC).
“Stablecoins continue to represent a potential risk to financial stability because they are acutely vulnerable to runs absent appropriate risk management standards,” the FSOC said in its annual report published on Dec. 6.
Stablecoin market is ‘heavily concentrated’
In line with the council’s views over recent years, the FSOC pointed out that the stablecoin market is “heavily concentrated, with a single firm holding around 70 percent of the sector’s total market value.”
The total stablecoin market capitalization is $205.48 billion, yet Tether (USDT) accounts for roughly 66.3% of that with a $136.8 billion market cap at the time of publication, according to CoinMarketCap data.
Although the FSOC did not specify any particular firm, it warned that 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.”
In September, Cointelegraph reported that Tether’s lack of third-party audits is raising investor concerns about a potential FTX-like liquidity crisis.
Stablecoins pose a challenge for ‘effective market discipline’
In May 2022, TerraUSD (UST), a stablecoin, unpegged from the US dollar in just a few days after $2 billion was unstaked. What was meant to hold 1:1 value with the US dollar ended up crashing to just $0.09.
The FSOC reiterated that stablecoin issuers “operate outside of, or in noncompliance with, a comprehensive federal prudential framework.”
“Although a few are subject to state-level supervision requiring regular reporting, many provide limited verifiable information about their holdings and reserve management practices,” it added.
The FSOC said it “poses a challenge for effective market discipline and increases the risk of fraud.”
FSOC recommends Congress pass stablecoin legislation
The FSOC urged the US government to act quickly and put in place a regulatory framework for stablecoin issuers.
“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.”
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The Council said it would “consider steps available to them” if no action is taken.
Tether CEO Paulo Ardoino recently told Cointelegraph that Europe’s forthcoming regulatory framework will introduce banking concerns for stablecoin issuers that could threaten the stability of the broader crypto space.
Under MiCA, stablecoin issuers will be required to hold at least 60% of reserve assets in European banks.
According to Ardoino, considering that banks can loan up to 90% of their reserves, this may introduce “systemic risks” for stablecoin issuers.
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