The Financial Stability Oversight Council (FSOC) has recently unveiled its annual report for 2024. The report sheds light on various risk factors and areas of concern within both the U.S. and international financial systems. Consistent with previous years, the report draws particular attention to the role of stablecoins and the broader digital asset sector. However, it does not explicitly suggest that FSOC is planning to take any definitive steps to address these issues.
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The Story So Far
The FSOC, made up of the heads of U.S. financial agencies, has once again warned in its annual report that unchecked growth of stablecoins could pose problems for both U.S. and international financial systems.
Why It’s Important
The FSOC is responsible for maintaining financial stability in the U.S. For years, the Council has been urging Congress to enact legislation that addresses the crypto market. The 2024 report continues to stress these concerns.
Breaking It Down
Over the past few years, the FSOC has repeatedly warned that stablecoins, due to their lack of federal regulatory oversight, and their collective size, could pose risks to financial stability. This year’s report reiterates this potential risk. It also urges Congress to pass legislation addressing stablecoins and market structure, echoing previous reports’ recommendations.
“We continue to see stablecoins as a potential risk to financial stability due to their heightened vulnerability to runs absent appropriate risk management standards,” the report states. The report also mentions Tether’s USDT, which makes up about 70% of the total global stablecoin market, as a potential regulatory concern.
The absence of a federal regulatory framework remains a persistent concern, according to the report. Although some states have stablecoin frameworks, the FSOC believes these are not sufficient.
“Although a few stablecoins are subject to state-level supervision requiring regular reporting, many provide limited verifiable information about their holdings and reserve management practices,” the report states.
For the past few years, the FSOC has been warning that it might take whatever actions it can, should Congress not act. However, it remains unclear to what extent it may actually be able to do so. The FSOC will soon be composed of new regulators.
“Many crypto-asset market firms and issuers remain outside of, or in noncompliance with, the U.S. financial regulatory framework,” the report states. “As such, the crypto-asset spot market may continue to experience significant fraud and manipulation. The Council recommends that Congress pass legislation that provides federal financial regulators with explicit rulemaking authority over the spot market for crypto-assets that are not securities.”
“We have also been addressing emerging risks from significant technological changes,” said Treasury Secretary Janet Yellen in a prepared statement. “Digital assets and artificial intelligence bring potential benefits such as efficiencies, but also financial risks, cyber risks, and risks from third-party service providers. The Council continues to call for legislation to create a comprehensive federal prudential framework for stablecoin issuers and for legislation on crypto assets that addresses the risks we have identified.”
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