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

The Financial Services Oversight Council (FSOC) is calling on Congress to pass legislation creating a comprehensive federal framework for regulating stablecoin issuers.

A government agency established under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 released a report on Friday, December 6, detailing what it perceives to be a growing threat to the U.S. financial system.

The FSOC says stablecoins “continue to pose a potential risk to financial stability because they are extremely vulnerable to a lack of appropriate risk management standards.”

Referring to Tether (USDT), the council noted that the industry is highly concentrated, with a single firm accounting for “approximately 70 percent of the industry’s total market capitalization.”

Why is Tether problematic?

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

Although the FSOC report did not name any companies, it warned that the lack of risk management standards at firms dealing with stablecoins made the industry “vulnerable to circumstances”. And Tether has faced scrutiny for failing to provide auditing to verify that the coin is backed 1:1 by the US dollar or other assets.

Critics argue that if Tether does not have sufficient reserves, it could collapse and cause major disruption in the crypto market. It accounts for more than 70% of the $204 billion market.

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

3/17) USDT audit has never been carried out despite being promised since 2015

This means we have to take their word for the vast majority of reserves because they cannot be independently verified

The first company to attempt an audit was even fired in 2018 for being too meticulous! pic.twitter.com/OYfj21HsKJ

— Justin Bons (@Justin_Bons) September 14, 2024

The firm previously settled charges from the U.S. Commodity Futures Trading Commission alleging it made “false or misleading statements” about the reserves backing its stablecoin in 2021.

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

Despite these concerns, stablecoins continue to be widely used, especially for trading and liquidity purposes.

In particular, the FSOC warned that if market dominance expanded, potential failure could “disrupt the cryptoasset market” and trigger “side effects” for the broader financial system.

A few stablecoin issuers are regulated at the state level, but many “operate outside or without complying with a comprehensive federal prudential framework.”

He also added that these firms often provide “limited verifiable information” about their reserves and assets, making it difficult to maintain “effective market discipline.”

Legal call to action

FSOC recommended passing stablecoin regulations to reduce risks. He called on Congress to develop a “comprehensive federal prudential framework for stablecoin issuers” and provide federal financial regulators with clear rule-making authority over the cryptoasset spot market.

“If comprehensive federal legislation is not enacted, Council members will continue to stand ready to consider steps available to them to address risks related to stablecoins,” he added.

This isn’t the first time the FSOC has pushed for such measures; Similar recommendations were made in the 2023 annual report.

Congress is currently considering the Stablecoin Payments Clarity Act, a bill aimed at creating clear regulations for stablecoin issuers. Although the legislation has not yet passed the House, crypto supporters believe it could move forward under the Trump administration.

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

Similarly, Banco Central do Brazil (BCB) has expressed concerns about the risks posed by stablecoins and proposed banning withdrawals from its custodial wallets as part of efforts to tighten regulatory oversight.