The FSOC has not pointed out any specific company but warned that if that firm’s market dominance continues to grow, its failure could mess up the crypto-asset market.
The FSOC also reveals that it constitutes a challenge for powerful market discipline and boosts the risk of fraud.
As per the CEO of Tether, considering everything, banks can loan up to 90% of their reserves, which may come up with systematic risks for stablecoin issuers.
The United States Financial Services Overnight Council (FSOC) reveals that the absence of solid risk management standards in Stablecoins makes them prone to continuing risks that lead to financial stability in danger.
On December 6, FSOC released its annual report, which mentioned that Stablecoins carries on to show a potential risk to financial stability as it is extremely likely to run a lack of suitable risk management standards.
In accordance with the views of the council in the last few years, the FSOC highlighted that the Stablecoin market is densely concentrated, having a sole company holding about 70 percent of the total market value of the sector.
The associated risk
At the time of writing, if we talk about the overall market capitalization of stablecoin, is $205.48 billion, and Tether holds about 66.3% with having $137.88 billion in market capitalization, as per the data available on CoinMarketCap.
However, the FSOC has not pointed out any specific company; it warned that if that firm’s market dominance continues to grow, its failure could mess up the crypto-asset market and make knock-on-effects on the traditional financial system.
It is noteworthy that the lack of third-party audits of Tether is somehow increasing investor concerns regarding the potential FTX-like liquidity crisis. In May 2022, soon after $2 billion was staked, TerraUSD(UST), a stablecoin, unpegged from the U.S. dollar.
It was expected to hold a 1:1 value with the U.S. dollar but it turned out collapsing to only $0.09. The Council repeated that stablecoin issuers work outside of, or in noncompliance with, a comprehensive federal provident framework.
It further went on adding that, however, some of them are concerned with state-level supervision that needs regular reporting, and many offer restricted verifiable data related to their holdings and reserve management practices.
The CEO’s Stance
The FSOC also reveals that it constitutes a challenge for powerful market discipline and boosts the risk of fraud. The council also requested the US government to work quickly and put in place a regulatory substructure for Stablecoin issuers.
It suggests that Congress pass legislation making an extensive federal provident substructure for stablecoin issuers to refer to run risk, payment system risks, market integrity, and investor and consumer protections.
The chief executive officer of Tether, Paul Ardoino revealed that the upcoming regulatory framework of Europe would come with banking issues for stablecoin issuers that could put the stability of the wider crypto space at risk.
Under markets in crypto-assets regulation, the Stablecoin issuers will need to hold a minimum of 60% of reserve assets in European banks. As per the CEO, considering everything, banks can loan up to 90% of their reserves, this may come up with systematic risks for Stablecoin issuers.