Stablecoins on shaky ground? US council calls on Congress to enact crypto oversight

The Financial Services Oversight Council (FSOC) is urging Congress to pass legislation establishing a comprehensive federal framework to regulate stablecoin issuers.

A government organization – created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 – has issued a report on Friday, December 6, detailing what he perceives as a growing threat to the U.S. financial system.

According to the FSOC, stablecoins “continue to pose a potential risk to financial stability because they are extremely vulnerable to runs in the absence of appropriate risk management standards.”

The sector also remains largely concentrated, with a single company accounting for “approximately 70% of the sector’s total market value”, the council said, referring to Tether (USDT).

Why Tether is problematic

As of 2024, Tether remains the dominant player in the stablecoin space.

Although the FSOC report did not mention any company names, it warned that the lack of risk management standards with companies involved in stablecoins makes the sector “vulnerable to runs.” And Tether faced scrutiny for failing to provide audits to verify that its coin is backed 1:1 by US dollars or other assets.

Critics claim that if Tether does not hold sufficient reserves, it could collapse, causing major disruption to the crypto market. representing more than 70% of a $204 billion market.

In a September 14 social media post, Cyber ​​Capital founder Justin Bons criticized Tether for its “lack of third-party audits,” calling the stablecoin “an existential threat to crypto.” See below.

Previously, the company ruler alleged charges by the United States Commodity Futures Trading Commission in 2021 for making “false or misleading statements” about the reserves backing its stablecoin.

Stablecoins have also come under increased scrutiny since the collapse of TerraUSD (UST). Once a leading stablecoin, UST lost its dollar peg in May 2022, triggering a catastrophic death spiral that wiped out more than $40 billion in crypto market value.

Despite these concerns, stablecoins remain widely used, particularly for trading and liquidity.

Specifically, the FSOC warned that if market dominance expands, its potential failure could “disrupt the crypto-asset market” and trigger “ripple effects” across the financial system as a whole.

A few stablecoin issuers are under state supervision, but many “operate outside of or in violation of a comprehensive federal prudential framework.”

Furthermore, he added that these companies often provide “limited verifiable information” about their reserves and holdings, making it difficult to ensure “effective market discipline.”

Calls for legislative action

The FSOC recommended adopting stable regulations to mitigate risks. He urged Congress to develop “a comprehensive federal prudential framework for stablecoin issuers” and provide federal financial regulators with explicit regulatory authority over the crypto-asset spot market.

“If comprehensive federal legislation is not enacted, Council members remain prepared to consider measures available to them to address the risks associated with stablecoins,” it adds.

This is not the first time the FSOC has pushed for such measures; similar recommendations were made in its 2023 annual report report.

Congress is currently considering the Clarity for Payment Stablecoins Act, a bill aimed at establishing clear regulations for stablecoin issuers. Although the legislation has not yet passed the House, crypto supporters believe it could progress under the arrival Trump administration.

Meanwhile, concerns about stablecoins extend beyond the United States. On December 4, the Australian Securities and Investments Commission published a consultation paper outlining plans to improve oversight of the stablecoin sector.

Likewise, the Banco Central do Brazil (BCB) raised concerns on the risks posed by stablecoins and proposed banning withdrawals to self-custody wallets as part of efforts to strengthen regulatory oversight.