Popular stablecoins, or digital assets designed to have a “relatively stable price,” are getting noticed by policymakers. While these crypto units are more stable than their counterparts, a recent Financial Services Oversight Council (FSOC) report suggests they can pose risks to the financial markets.

Specifically, the FSOC 2024 Annual Report argues that issuers lack trustworthy information about their holdings and policies on reserve management practices.

The Council contends that transparency may compromise the holders and prevent analysts from making accurate market analyses. As such, the Council is urging the US Congress to discuss and pass new legislation that can regulate stablecoins and their issuers.

This isn’t the first time there’s a call for regulation, and a comprehensive federal framework for these digital assets is not new. Outgoing Treasury Secretary Janet Yellen has also called for reviewing and passing new legislation in February 2024. Yellen’s recommendations last February were based on an FSOC report and recommendations made two years earlier.

The latest FSOC report about the potential impacts of stablecoins on the financial system was released on Friday, December 6th. According to the council, these stablecoins threaten the country’s economic stability and are at risk of running due to the absence of risk management standards.

The council also raises the question of transparency, which is lacking among stablecoins and their issuers. The FSOC says the lack of transparency in holdings and reserves policies will affect holders and prevent them from making an informed market analysis.

Tether remains the top stablecoin, with a $138 billion market capitalization as of this writing. While the FSOC report did not specifically identify Tether as a problem, this stablecoin has faced issues and industry scrutiny.

2/17) The potential for collapse here is greater than Terra Luna!

Making it one of the biggest existential threats to crypto as a whole

As we have to trust they hold $118B in collateral without proof!

Even after the CFTC fined Tether for lying about their reserves in 2021… pic.twitter.com/KoJFbyjRj1

— Justin Bons (@Justin_Bons) September 14, 2024

Tether has been hit for its failure to provide transparent audits that verify that its token is backed 1:1 by the USD or other assets.

Some critics say Tether may collapse if it doesn’t hold sufficient reserves, which can disrupt the broader crypto market. Cyber Capital founder Justin Bons hit Tether last September 14th for its lack of third-party audits. In a Twitter/X post, Bons argued that Tether is an “existential threat” to the cryptocurrency sector,” and added that the issuer has failed to provide an audit since 2015.

Aside from increased calls for scrutiny and accountability, many in the industry call for new stablecoin legislation. The FSOC is warning against the market dominance of some stablecoin issues, saying that these can disrupt the industry and may also impact the financial system. While some issuers are under supervision, many companies work outside a federal framework.

As a response, the FSOC is recommending new legislation to cover stablecoins to address the potential risks and issues. The council calls on the US Congress to draft a stablecoin framework for issuers and authorize the federal financial regulators with rulemaking powers over the spot market for digital assets.

The FSOC warns that if no legislation is passed, it is ready to consider other steps available to manage the risks.

Featured image from DALL-E, chart from TradingView

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