According to the Financial Stability Oversight Council’s (FSOC’s) 2024 Annual Report, it has raised concerns about stablecoins posing a growing risk to financial stabilty due to insufficient oversight and significant concentration of market.
In the report, it was recommended that urgent legislation be taken to establish a federal framework to help stablecoin issues mitigate their risks due to rapid growth and lack of transparency.
In addition, it called for tighter supervision of the larger crypto market in light of its growing integration into the traditional banking system and institutional adoption.
Stablecoins: Recommendations
The FSOC emphasized the vulnerability of stablecoins to market runs, despite their marketing as digital currencies that are a reliable alternative to traditional currency.
It also argued that the opacity surrounding issuers’ reserves and operational practices further undermines market discipline and increases the potential for fraud. It was noted in the report that one entity controls approximately 70% of market capitalization, which increases the likelihood of systemic failures if the issuer fails. The report did not name the company.
The council called on Congress to create a federally regulated prudential system for stablecoins. The council recommended a number of measures, including requiring reserve management and setting capital and liquidity minimum standards.
This report emphasized that an appropriate framework will address the risks associated with payment system interruptions, and improve investor and customer protections. FSOC members also highlighted stablecoins’ growing integration with traditional financial systems as a key concern.
Report warned of the dangers that an instabil stablecoin could have on broader markets without proper risk management. Without legislative action, federal agencies were advised to investigate alternative regulatory actions under the existing powers.
Integrate TradFi
The FSOC also detailed the expanding footprint of crypto-assets in traditional markets and warned that the sector’s rising integration with traditional finance also required increased oversight.
The total value of the global crypto market is modest, just below $2 trillion, compared with traditional financial markets. However recent approvals by regulators on spot ETPs have made it easier for investors to access these assets. The market value of spot crypto-asset ETPs surged to nearly $80 billion in 2024 following the SEC’s approval of several listings earlier this year.
Despite its growth, FSOC emphasized the fact that the crypto asset ecosystem is still a sector with high risks. This report identifies significant regulatory gaps for the crypto-spot market. It cites a lack explicit federal rules to combat fraud, manipulation of markets, and other risks.
The FSOC suggested that to counteract these challenges federal financial regulators be given explicit authority to supervise crypto markets outside of securities regulations.
The FSOC acknowledged the potential for digital assets to transform the financial industry, but also stressed the importance of a balanced approach in regulatory policy that encourages innovation and protects the markets.
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Assad Jafri
AJ has been a journalist for more than a decade, and he’s been a fanatic since the 2011 Arab Spring in Yemen. Specialized in financial journalism and now focused on crypto-reporting.
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