The stablecoin market has recently achieved a remarkable milestone, reaching a valuation of $190 billion in November, surpassing its previous high of $188 billion set in April 2022. This achievement reflects a substantial growth of 9.94% from October, marking the most significant monthly increase since November 2021. However, as stablecoins continue to gain traction, the U.S. Financial Services Oversight Council (FSOC) has published its 2024 annual report, highlighting stablecoins as a potential threat to financial stability. The report underscores the importance of robust risk management standards, warning that stablecoins are “acutely vulnerable to runs,” which could have far-reaching implications for both the crypto and traditional financial systems.
Market Concentration and Vulnerabilities
The FSOC has brought attention to the concentrated nature of the stablecoin market, where a single issuer holds a dominating share of approximately 70% of the market’s total value. Although the report does not directly name Tether (USDT), it is evident from the data that Tether, with a market cap of $136.8 billion, accounting for 66.3% of the $205.48 billion total stablecoin market, aligns with this description. The Council cautioned that the collapse of such a dominant player could cause significant disruption to the wider cryptocurrency market and potentially affect the traditional financial system. Concerns have been previously raised regarding Tether’s lack of third-party audits, drawing parallels with FTX’s liquidity crisis, which has intensified these fears.
Challenges to Market Discipline
The FSOC has also highlighted the insufficient regulatory framework governing stablecoin issuers. Many of these issuers operate with limited oversight at the federal level, with some only subject to minimal state-level supervision. The absence of transparent reporting on holdings and reserves further impedes market discipline and elevates the risk of fraudulent activities. Reflecting on 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 dangers posed by unregulated stablecoins and their potential to destabilize the market. To address these challenges, the FSOC has urged Congress to swiftly enact federal legislation to regulate stablecoin issuers. Such legislation should prioritize safeguarding against runs, ensuring secure payment systems, maintaining market integrity, and protecting investors. The FSOC has also warned that if Congress does not take action soon, they may pursue alternative measures.
Crypto Implications
Tether CEO Paolo Ardoino has recently expressed concerns over Europe’s upcoming Markets in Crypto-Assets (MiCA) regulations, which require stablecoin issuers to hold at least 60% of their reserves in European banks. Ardoino cautioned that given banks’ ability to lend up to 90% of their reserves, these regulations could introduce “systemic risks,” potentially destabilizing the crypto market. The FSOC’s warning underscores the urgency of implementing comprehensive regulatory measures to ensure the stability of both the crypto and traditional financial markets as stablecoins continue to grow in prominence.
