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

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As a seasoned researcher with over two decades of experience in financial markets and digital assets, I find the current state of stablecoins, particularly Tether (USDT), deeply concerning. The lack of transparency and third-party audits, coupled with the dominance of a single player in the market, creates an environment ripe for potential systemic risks.

The Financial Services Oversight Council (FSOC) is advocating for Congress to approve a bill that creates a complete federal system for supervising companies that issue stablecoins.

On December 6th, a government agency, founded under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, released a report highlighting their concerns about an increasing danger to the American financial system.

According to the Financial Stability Oversight Council (FSOC), stablecoins could potentially destabilize the financial system due to their susceptibility to bank runs if proper risk management guidelines aren’t in place.

In simple terms, one major company, specifically Tether (USDT), holds approximately 70% of the entire market worth in this particular industry, as noted by the council.

Why Tether is problematic

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

The Financial Stability Oversight Council’s report didn’t specifically name any companies, but it warned that the absence of risk management guidelines in firms dealing with stablecoins could make the industry susceptible to bank runs. Moreover, Tether has faced criticism for failing to provide audits that confirm its coin is fully backed by U.S. dollars or other assets.

Critics claim that if Tether doesn’t have enough backing funds, it might implode, leading to a significant turbulence within the cryptocurrency industry, which presently accounts for more than 70% of the $204 billion market cap.

On September 14th, Justin Bons, founder of Cyber Capital, voiced his criticism towards Tether in a social media post, particularly highlighting the absence of independent audits. He referred to Tether as a potential danger to the entire cryptocurrency sphere, labeling it an “existential threat.

Since Tether (USDT) initially pledged to conduct an audit back in 2015, one has yet to materialize. As a result, most of the reserves remain unverified because they cannot be independently confirmed. To add to this, the first company that attempted an audit was dismissed for being excessively meticulous in 2018!

— Justin Bons (@Justin_Bons) September 14, 2024

Earlier in 2021, this company faced allegations from the U.S. Commodity Futures Trading Commission regarding false or deceptive claims about the reserves supporting its stablecoin. The charges were eventually settled.

Since the fall of TerraUSD (UST) in May 2022, there has been increased examination of stablecoins. Previously a significant player, UST failed to maintain its dollar parity, initiating a devastating chain reaction that led to a loss of approximately $40 billion in value within the cryptocurrency market, a phenomenon known as a catastrophic death spiral.

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

To put it simply, the Financial Stability Oversight Council (FSOC) stated that if a dominant player in the cryptocurrency market grows too large, its collapse could cause turmoil within the digital currency market. This instability might also have repercussions on the overall financial system as a whole.

As a researcher, I’ve observed that while some stablecoin issuers fall under the watchful eye of state-level oversight, a significant number function beyond the purview of, or even in non-compliance with, a robust federal regulatory framework designed to ensure prudential oversight.

Additionally, it was mentioned that these companies frequently offer “scant confirmable details” regarding their reserves and assets, which complicates the implementation of “rigorous market oversight.

Calls for legislative action 

The Financial Stability Oversight Council (FSOC) proposed that rules be established for stablecoins to mitigate potential risks. They urged lawmakers in Congress to construct a comprehensive federal regulatory structure for stablecoin issuers and grant federal financial regulators the explicit power to create guidelines for the crypto-asset trading market.

If a broad federal law isn’t passed, council members are ready to explore measures they can take to manage the risks associated with stablecoins.

Previously, the Financial Stability Oversight Council (FSOC) has advocated for these types of actions before; they suggested something comparable in their annual report from the year 2023.

At present, the Clarity for Payment Stablecoins Act, a proposed law that sets out guidelines for stablecoin issuers, is being scrutinized by Congress. Although this bill hasn’t been approved by the House yet, supporters of cryptocurrency are optimistic that it could move forward under the new Trump administration.

Beyond the U.S., there are growing worries about stablecoins. On December 4th, the Australian Securities and Investments Commission unveiled a proposal for increased supervision over the stablecoin industry by publishing a consultation paper.

In a similar vein, the Brazilian Central Bank (BCB) has voiced worries over the potential dangers of stablecoins and suggested enforcing a ban on withdrawals into personal digital wallets, as part of their initiative to strengthen regulatory supervision.

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2024-12-07 18:04