Popular stablecoins, or digital assets designed to have a “relatively stable price,” are getting noticed by policymakers. Although 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 2024 Annual Report asserts that issuers lack reliable information about their holdings and policies regarding reserve management practices.
The Council asserts that transparency can compromise holders and prevent analysts from conducting accurate market analysis. As such, the Council urges the U.S. Congress to discuss and pass new legislation that could regulate stablecoins and their issuers.
FSOC calls for new regulatory framework on stablecoins
This is not the first time a call for regulation has been made, and a comprehensive federal framework for these digital assets is not new. Outgoing Treasury Secretary Janet Yellen also called for a review and passage of new legislation in February 2024. Yellen’s recommendations last February were based on an FSOC report and recommendations made two years earlier.
The latest FSOC report on the potential impacts of stablecoins on the financial system was released on Friday, December 6. According to the council, these stablecoins threaten the country’s economic stability and are at risk of disappearing due to the lack of risk management standards.
The council also raises the issue of transparency, which is lacking among stablecoins and their issuers. The FSOC asserts that lack of transparency in holding and reserve policies will affect holders and prevent them from conducting informed market analysis.
Tether remains in the crypto spotlight
Tether remains the leading stablecoin, with a market capitalization of $138 billion at the time of writing. Although the FSOC report did not specifically identify Tether as a problem, the stablecoin has faced issues and industry scrutiny.
2/17) The potential for collapse here is greater than that of Terra Luna!
Which makes it one of the biggest existential threats to crypto as a whole
As we are to believe, they are holding $118 billion 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 for its failure to provide transparent audits verifying that its token is backed 1:1 by USD or other assets.
Some critics say Tether could collapse if it doesn’t hold enough reserves, which could disrupt the broader crypto market. Cyber Capital founder Justin Bons hit Tether on September 14 for its lack of third-party audits. In a post on Twitter/X, Bons claimed that Tether posed an “existential threat” to the cryptocurrency industry and added that the issuer had not provided an audit since 2015.
Calls for laws intensify
In addition to growing calls for scrutiny and accountability, many in the industry are calling for new stablecoin legislation. The FSOC warns against market domination by some stablecoin issuances, saying these can disrupt the industry and also impact the financial system. While some issuers are under supervision, many companies operate outside the federal framework.
In response, the FSOC recommends new legislation covering stablecoins to address potential risks and issues. The council calls on the US Congress to draft a stable framework for issuers and authorize federal financial regulators to exercise regulatory powers over the digital asset spot market.
FSOC cautions that if no legislation is passed, it is prepared to consider other available measures to manage risks.
Featured image of DALL-E, chart by TradingView
