The Financial Stability Oversight Council (FSOC) raised concerns that stablecoins pose a mounting risk to financial stability due to inadequate oversight and significant market concentration, according to its 2024 annual report.
The report called for urgent legislative action to create a comprehensive federal framework for stablecoin issuers to mitigate risks tied to their rapid growth and limited transparency.
It also called for stricter oversight of the wider crypto market amid growing integration with the traditional financial system and sustained institutional adoption.
Recommendations for stablecoins
The FSOC emphasized that stablecoins, often marketed as reliable digital alternatives to traditional currencies, are acutely vulnerable to runs without stringent risk management standards.
It also argued that the opacity surrounding issuers’ reserves and operational practices further undermines market discipline and increases the potential for fraud. The report noted that one issuer accounts for approximately 70% of the market, amplifying the risk of systemic disruptions should the entity fail. However, it did not explicitly name the entity.
The council urged Congress to establish a comprehensive federal prudential framework for stablecoin issuers. Recommended measures include requiring robust reserve management, setting minimum capital and liquidity standards, and implementing regular reporting obligations.
The report stressed that such a framework would address risks related to payment system disruptions and enhance investor and consumer protections. FSOC members also highlighted stablecoins’ growing integration with traditional financial systems as a key concern.
The report warned that without appropriate risk management standards, any instability in the stablecoin market could cascade into broader financial markets. In the absence of legislative action, the council advised federal agencies to explore alternative regulatory measures under existing authorities.
Integration with 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.
While the total global market value of crypto-assets remains modest compared to traditional financial markets at just under $2 trillion, recent regulatory approvals of spot exchange-traded products (ETPs) have heightened investor accessibility. 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 their growth, the FSOC emphasized that the crypto-asset ecosystem remains a high-risk sector. The report identified significant gaps in regulatory oversight of the crypto spot market, citing a lack of explicit federal rulemaking authority to address fraud, market manipulation, and other risks.
To counter these challenges, the FSOC recommended granting federal financial regulators explicit powers to oversee crypto markets that fall outside securities regulation.
While acknowledging the transformative potential of digital assets, the FSOC emphasized the need for a balanced regulatory approach that supports innovation while safeguarding financial markets.