Well-known stablecoins, or digital currencies intended to maintain a “relatively steady value,” are drawing the attention of lawmakers. Although these crypto assets are more consistent than their alternatives, a recent Financial Services Oversight Council (FSOC) report indicates they may pose threats to the financial ecosystem.
Specifically, the FSOC 2024 Annual Report asserts that issuers lack reliable data about their assets and protocols on reserve management practices.
The Council argues that the lack of transparency could jeopardize the holders and hinder analysts from conducting precise market evaluations. Therefore, the Council is urging the US Congress to engage in discussions and enact new legislation aimed at regulating stablecoins and their issuers.
FSOC Advocates For New Regulatory Structure On Stablecoins
This isn’t the inaugural instance of a push for regulation, and a detailed federal framework for these digital currencies is not unprecedented. Former Treasury Secretary Janet Yellen has also advocated for a review and enactment of new legislation as of February 2024. Yellen’s proposals last February were grounded in an FSOC report and suggestions made two years earlier.
The most recent FSOC report concerning the potential consequences of stablecoins on the financial system was published on Friday, December 6th. The council believes that these stablecoins endanger the nation’s economic stability and face the risk of devaluation due to the lack of risk management protocols.
The council brings attention to the issue of transparency, which is deficient among stablecoins and their issuers. The FSOC states that the absence of clarity regarding holdings and reserve policies will affect holders and prevent them from conducting informed market assessments.
Tether Continues To Be The Center Of Attention In Crypto
Tether continues to dominate as the leading stablecoin, boasting a $138 billion market cap as of this writing. Although the FSOC report did not specifically highlight Tether as a concern, this stablecoin has encountered challenges and industry criticism.
2/17) The chances of collapse here are greater than Terra Luna!
Making it one of the most significant existential threats to crypto as a whole
As we must trust they possess $118B in collateral without any evidence!
Even after the CFTC penalized Tether for misrepresenting their reserves in 2021… pic.twitter.com/KoJFbyjRj1
— Justin Bons (@Justin_Bons) September 14, 2024
Tether has faced criticism for its inability to deliver transparent audits that confirm that its token is backed 1:1 by the USD or other assets.
Some detractors argue that Tether could fail if it does not maintain adequate reserves, which could disrupt the wider crypto market. Cyber Capital founder Justin Bons criticized Tether last September 14th for its absence of third-party audits. In a post on Twitter/X, Bons described Tether as an “existential threat” to the cryptocurrency industry and noted that the issuer has not conducted an audit since 2015.
Demands For Legislation Amplify
In addition to escalating calls for oversight and accountability, many within the industry are advocating for new stablecoin legislation. The FSOC is cautioning against the market control exerted by certain stablecoin issuers, indicating that these dynamics can disrupt the sector and potentially affect the financial system. While some issuers are regulated, many companies operate outside a federal framework.
In response, the FSOC is proposing new legislation to encompass stablecoins to mitigate the potential dangers and concerns. The council is urging the US Congress to formulate a stablecoin framework for issuers and empower federal financial regulators with rulemaking authority over the spot market for digital assets.
The FSOC warns that if no legislation is enacted, it is prepared to explore alternative measures to manage the risks.
Featured image from DALL-E, chart from TradingView
