The United States Financial Services Oversight Council (FSOC) has flagged stablecoins as a potential threat to financial stability in its 2024 annual report, citing vulnerabilities due to inadequate risk management frameworks.

Stablecoins at Risk of ‘Runs’

The FSOC highlighted that stablecoins are “acutely vulnerable to runs” without appropriate safeguards in place. The council expressed concerns that the absence of robust risk management could lead to significant disruptions, not only within the crypto-asset market but also in the broader financial system.

Market Dominance Concerns

The stablecoin market remains heavily concentrated, with a single issuer dominating the sector. According to CoinMarketCap, Tether accounts for 66.3% of the $205.48 billion total stablecoin market capitalisation. While the FSOC did not directly name Tether, it warned that the growing dominance of any one issuer could amplify systemic risks in the event of failure.

Challenges in Oversight

The report also criticised stablecoin issuers for operating outside comprehensive federal regulations. Many provide limited transparency regarding their holdings and reserve management practices, increasing the risk of fraud and hindering market discipline.

The FSOC pointed to past failures, such as the collapse of TerraUSD (UST) in May 2022, when a $2 billion withdrawal triggered a de-pegging from the US dollar, wiping out its value almost entirely.

Call for Regulatory Action

The council urged Congress to establish a federal framework to oversee stablecoin issuers, addressing risks such as market integrity, investor protection, and payment system vulnerabilities. It warned that, without action, regulators might need to intervene independently.

European Challenges for Stablecoins

In Europe, Tether CEO Paolo Ardoino has raised concerns over the forthcoming MiCA regulations. These rules will require stablecoin issuers to hold at least 60% of reserve assets in European banks. Ardoino warned that this could introduce systemic risks, as banks themselves lend out the majority of their reserves.

The FSOC’s report underscores the need for swift legislative action to mitigate the risks posed by stablecoins, ensuring the stability of both crypto and traditional financial markets.