FSOC Sounds the Alarm on Stablecoins and Stability

Dec 7, 2024

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The Financial Services Oversight Council (FSOC) has some big concerns about stablecoins. These digital assets, designed to hold steady value, are under the microscope. The FSOC thinks they could mess with financial stability. And here’s why.

Stablecoins Need Better Risk Management

Stablecoins are in trouble, says the FSOC. They lack proper risk management. Without clear rules, they can face “runs.” A run happens when people panic and withdraw their money all at once. This could leave the stablecoin issuer unable to pay everyone back. Remember TerraUSD? It crashed from $1 to just $0.09 in 2022. That disaster sent shockwaves through the crypto world.

FSOC believes Congress needs to step in. They want a law that forces stablecoin issuers to follow strict rules. These would cover risks like sudden crashes, fraud, and weak payment systems. Without these changes, stablecoins remain a ticking time bomb.

The Stablecoin Market Is Too Concentrated

The FSOC has another issue: the stablecoin market is dominated by just a few players. Tether (USDT) leads the pack, controlling of the market. That’s a whopping $136.8 billion out of a $205 billion market! If Tether falters, it could pull the entire crypto market—and maybe traditional finance—into chaos.

The FSOC sees this as dangerous. They argue that when one firm controls so much, its failure could lead to widespread losses. The crypto world is fragile enough without putting all its eggs in one basket.

Caitlin Long from Custodia Bank dropping truth bombs on FSOC’s stablecoin FUD fr

like… they’re mad about 70% market concentration but conveniently forget they literally pushed banks away from crypto

lowkey hilarious how FSOC crying about “unregulated” stables while ignoring…

— AlphaChatX (@AlphaChatX)

Transparency Is a Big Problem

Stablecoin issuers also lack transparency. Many don’t provide clear information about their reserves. Are they backed by real dollars or risky assets? Nobody knows for sure. This creates a breeding ground for fraud and weakens trust in the system.

Tether, for example, has faced criticism for not having third-party audits. Critics worry it might not have enough reserves to back its coins. This shadow of doubt is exactly why the FSOC is pushing for federal rules. If stablecoin issuers must disclose their reserves, it will create trust and reduce risks.

Congress Holds the Key to Stablecoins’ Future

The FSOC is urging Congress to take charge. A federal framework could make stablecoins safer for everyone. It would focus on issues like investor protection and market stability. Without it, the FSOC says it might have to take matters into its own hands.

Even Tether’s CEO has concerns, but about Europe’s new rules. European laws will soon require stablecoin issuers to hold 60% of their reserves in banks. This might sound good, but banks often loan out most of their reserves. It could create even more risks for stablecoins like USDT.

Stability Depends on Action

The FSOC has made it clear: stablecoins pose real risks. From concentration to transparency, the problems are piling up. Congress needs to act fast. A well-regulated stablecoin market can support both the crypto ecosystem and financial stability. But until then, stablecoins remain a risky bet.

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