Key Takeaways
- Â FSOC stated that without oversight the stablecoin market could disrupt financial stability
- The FSOC warned that the dominance of a single issuer heightens systemic risks.Â
The U.S. Financial Stability Oversight Council (FSOC) has called for comprehensive federal regulation of stablecoins, citing significant risks associated with their rapid growth, market concentration, and limited transparency. In its 2024 annual report, the council emphasized that without adequate oversight, the stablecoin market could disrupt financial stability and spill over into traditional markets.
Stablecoins, often marketed as stable digital currencies backed by real assets, are increasingly integrated into the broader financial system. The FSOC noted that one issuer holds approximately 70% of the stablecoin market, valued at $205.48 billion. While the report did not explicitly name the firm, data from CoinMarketCap indicates that Tether dominates the sector with $136.8 billion in market share, representing 66.3% of the total market capitalization.
The FSOC warned that the dominance of a single issuer heightens systemic risks. If this issuer were to fail, the ripple effects could disrupt crypto-asset markets and potentially affect traditional financial systems. The council drew parallels to the collapse of TerraUSD (UST) in 2022, which lost its peg to the U.S. dollar after $2 billion in withdrawals, plunging its value to $0.09 and causing turmoil in the crypto sector.
Further, in the report, FSOC highlighted the lack of a comprehensive federal regulatory framework for stablecoin issuers. While some operators are subject to state-level oversight, many provide limited information about their reserves and operational practices, creating vulnerabilities to fraud and undermining market discipline. The opacity surrounding reserve management further amplifies these risks, the FSOC stated.
To address these challenges, the council urged Congress to enact legislation requiring stablecoin issuers to adhere to stricter standards. Recommended measures include robust reserve management, minimum capital and liquidity thresholds, and regular reporting obligations. Such regulations, the FSOC argued, would enhance market integrity, reduce risks of payment system disruptions, and protect investors and consumers.
The council also emphasized the need for stronger oversight of the broader crypto market, citing its growing integration with traditional finance. Recent approvals of spot exchange-traded products (ETPs) have made crypto-assets more accessible to investors, with the market value of spot ETPs reaching nearly $80 billion in 2024. Despite this growth, the FSOC described the crypto ecosystem as high-risk due to gaps in regulatory oversight, particularly in addressing fraud and market manipulation in the spot market.
The report stressed that without immediate action, stablecoins could become increasingly vulnerable to runs and liquidity crises, posing threats to the broader financial system. In the absence of legislative progress, the council recommended that federal agencies explore alternative regulatory approaches using existing authorities.
The FSOC’s concerns echo broader global apprehensions. In Europe, the Markets in Crypto-Assets (MiCA) regulations impose stringent reserve requirements on stablecoin issuers. Similar crackdowns have occurred in Germany and the United Kingdom, where authorities have acted against non-compliant crypto ATM operators.
