The global stablecoin market has soared to a new high of $190 billion in November, breaking the previous record of $188 billion from April 2022. This marks an impressive 9.94% growth from October, the biggest monthly jump since November 2021. While stablecoins are rising, The U.S. Financial Services Oversight Council (FSOC) has issued its 2024 annual report, flagging stablecoins as a potential threat to financial stability.
The report emphasizes that without proper risk management standards, stablecoins are “acutely vulnerable to runs,” posing risks that could ripple through both the crypto and traditional financial systems.
Market Concentration and Vulnerabilities
The FSOC highlighted the heavy concentration in the stablecoin market, noting that a single issuer dominates approximately 70% of the market’s total value. Although the report did not explicitly name Tether (USDT), it is evident that Tether, with a $136.8 billion market cap—representing 66.3% of the $205.48 billion total stablecoin market—matches this description.
The Council warned that the failure of such a dominant player could severely disrupt the broader crypto market and potentially affect the traditional financial system. Concerns have previously been raised about Tether’s lack of third-party audits, with comparisons made to FTX’s liquidity crisis, further doubling fears.
Challenges to Market Discipline
The FSOC also pointed out the lack of a robust regulatory framework for stablecoin issuers. Many issuers operate outside federal oversight, with some under minimal state-level supervision. The Council noted the absence of transparent reporting on holdings and reserves, which hinders market discipline and increases risks of fraud.
Recalling the collapse of TerraUSD (UST) in 2022—when the stablecoin lost its peg to the U.S. dollar, plunging from $1 to $0.09—the FSOC reiterated the risks of unregulated stablecoins and their potential to destabilize the market.
To help stabilize existing challenges, the FSOC has called on Congress to quickly create a federal law to regulate stablecoin issuers. This law should focus on issues like protecting against runs, ensuring safe payment systems, maintaining market integrity, and protecting investors. The FSOC also warned that if Congress doesn’t act soon, they may take other actions.
Crypto Implications
Tether CEO Paolo Ardoino recently highlighted concerns over Europe’s upcoming MiCA regulations, which mandate stablecoin issuers to hold at least 60% of reserves in European banks. Ardoino warned that since banks can loan up to 90% of their reserves, these rules could introduce “systemic risks,” potentially destabilizing the crypto market.
The FSOC’s warning underscores the urgency of implementing regulatory measures to secure the stability of both the crypto and traditional financial markets as stablecoins grow in prominence.
