Policymakers are paying attention to popular stablecoins, or digital assets designed to have a “relatively stable price.” While these crypto units are more stable than their counterparts, a recent report from the Financial Services Oversight Council (FSOC) suggests that they may pose risks to financial markets.
Specifically, the FSOC Annual Report 2024 argues that issuers lack reliable information on their holdings and policies on reserve management practices.
The Council maintains that transparency can compromise holders and prevent analysts from performing accurate market analysis. As such, the Council urges the US Congress to discuss and pass new legislation that could regulate stablecoins and their issuers.
FSOC calls for new regulatory framework for stablecoins
This is not the first time that there is a regulation calland a comprehensive federal framework for these digital assets is not new. Outgoing Treasury Secretary Janet Yellen also called for reviewing and passing new legislation in February 2024. Yellen’s recommendations last February were based on an FSOC report and recommendations made two years earlier.
The FSOC’s latest report on the potential impacts of stablecoins on the financial system was published on Friday, December 6. According to the council, these stablecoins threaten the country’s economic stability and are at risk of disappearing due to a lack of risk management standards.
The council also raises the issue of transparency, which is lacking among stablecoins and its issuers. The FSOC says a lack of transparency in holding and reserve policies will impact holders and prevent them from conducting informed market analysis.
Tether remains in the focus of cryptocurrencies
Tether remains the leading stablecoin, with a market capitalization of $138 billion at the time of writing. While the FSOC report did not specifically identify Tether as a problem, this stablecoin has faced issues and industry scrutiny.
02/17) The potential for collapse here is greater than Terra Luna!
Making it one of the biggest existential threats to cryptocurrencies as a whole.
Since we have to trust, they have 118 billion dollars in collateral without proof!
Even after the CFTC fined Tether for lying about its reserves in 2021… pic.twitter.com/KoJFbyjRj1
—Justin Bons (@Justin_Bons) September 14, 2024
Tether has been hit by not providing transparent audits verifying that its token is backed 1:1 by USD or other assets.
Some critics say that Tether may collapse if it does not have enough reserves, which may disrupt the broader crypto market. Cyber Capital founder Justin Bons criticized Tether on September 14 for its lack of third-party audits. In a Twitter/X post, Bons argued that Tether is an “existential threat” to the cryptocurrency sector, adding that the issuer has not provided an audit since 2015.
Calls for legislation intensify
In addition to growing calls for scrutiny and accountability, many in the industry are calling for new stablecoin legislation. The FSOC warns against the market dominance of some stablecoin issuances, saying they can disrupt the industry and also affect the financial system. While some issuers are under supervision, many companies work outside the federal framework.
In response, FSOC recommends new legislation to cover stablecoins to address potential risks and problems. The council calls on the US Congress to develop a stablecoin framework for issuers and authorize federal financial regulators with regulatory powers over the digital asset spot market.
The FSOC advises that if no legislation is passed, it is willing to consider other measures available to manage risks.
Featured image of DALL-E, TradingView chart
