The Financial Stability Oversight Council (FSOC) has sounded the alarm on stablecoins, warning that their rapid growth and lack of oversight pose a significant risk to financial stability. In its 2024 annual report, the FSOC called for urgent legislative action to create a comprehensive federal framework for stablecoin issuers to address these concerns.
Stablecoins, which are digital assets designed to maintain a stable value by pegging them to traditional currencies like the US dollar, are a popular choice for investors looking for a reliable alternative to volatile cryptocurrencies. However, the FSOC highlighted that the lack of transparency around issuers’ reserves and operational practices could lead to market instability and potential fraud.
The council also expressed concern over the high concentration of market share held by one stablecoin issuer, which accounts for approximately 70% of the market. This concentration increases the risk of systemic disruptions in the event of a failure by the issuer, underscoring the need for stricter oversight.
To mitigate these risks, the FSOC recommended that Congress establish a federal prudential framework for stablecoin issuers. This framework would include measures such as requiring robust reserve management, setting minimum capital and liquidity standards, and implementing regular reporting obligations. By implementing these measures, the FSOC believes that risks related to payment system disruptions can be addressed and investor and consumer protections enhanced.
In addition to stablecoins, the FSOC also highlighted the growing integration of crypto-assets into traditional financial markets. While the total global market value of crypto-assets is relatively small compared to traditional financial markets, recent regulatory approvals of spot exchange-traded products (ETPs) have increased investor accessibility to these assets.
Despite their growing popularity, the FSOC noted that the crypto-asset ecosystem remains a high-risk sector due to significant regulatory gaps. To address these challenges, the council recommended granting federal financial regulators explicit powers to oversee crypto markets that fall outside securities regulation.
While recognizing the transformative potential of digital assets, the FSOC emphasized the importance of a balanced regulatory approach that supports innovation while safeguarding financial markets. By taking proactive measures to address the risks associated with stablecoins and crypto-assets, the FSOC believes that financial stability can be preserved in an increasingly digital financial landscape.