• Financial Stability Oversight Council (FSOC) warns of risks from stablecoins and crypto market growth.
• Stablecoins could destabilize due to “runs,” lack of transparency, and market concentration.
• FSOC urges a federal framework for stablecoin issuers with reserve standards and audits.
• Growing crypto integration with traditional markets calls for swift regulatory action.

Financial Stability Oversight Council (FSOC) expressed its concern about stablecoins and, generally, cryptocurrency markets showing increasing vulnerability in its annual report for 2024. The council emphasized the need for urgent legislative action to address vulnerabilities stemming from rapid growth, poor oversight, and deeper integration with traditional finance.

It highlighted the fact that while these innovative digital assets hold so much potential, they can be a substantial threat to financial stability if the proper regulatory policy is not laid out or enacted.

Accordingly, stablecoins were presented as one of the headline risks. Conceived to hold their value steady and often pitched as reliable digital proxies for traditional currencies, they are seeing rising utilization in global markets. Underlining the report, such coins are prone to ‘runs’ or a moment when a wave of immediate redemptions could undermine the market.

This risk is exacerbated by the lack of transparency over reserves and practices of issuers, therefore undermining investor confidence and raising the potential for fraud. The council also commented that a single issuer controls an estimated 70% share of the market, and “this increases the potential disruption to the system if the business fails.”

New Rules for Stablecoin Safety

To mitigate these risks, the FSOC called on Congress to create a Federal framework of rules for stablecoin issuers. It called for high reserve management standards to ensure that the stablecoins are backed with high-quality liquid assets, a minimum level of capital, and liquidity to absorb shocks in the market.

Regular audits and transparency requirements were also recommended to be put in place with a view to accountability and consumer protection. The FSOC argued that such measures would address vulnerabilities associated with disrupted payment systems and ensure safe integration of stablecoins into the financial system.

The report also pointed out the growing interconnectedness of crypto-assets with traditional financial markets. Although the global crypto market is less than $2 trillion, the level of investor exposure has greatly increased due to regulatory approvals of spot ETPs.

SEC Approvals Spark $80B Growth in Stablecoin ETPs

In 2024, after a string of high-profile approvals granted by the SEC, spot crypto-asset ETPs hit nearly US$80 billion in market value. Growing institutional investment is underpinned by a need for gaps in fraud, manipulative practices in markets, and investor protection regulation.

Despite warnings, the FSOC said digital assets have the potential to transform markets. The report noted that a balance should be struck between innovation and the protection of the financial markets. Unless legislation is taken quickly, the council warned that federal agencies may have little choice but to use existing authorities to address these risks in an ad hoc way.

The 2024 Report by FSOC is a call to action by policymakers. It impresses upon the need to develop an effective regulatory regime that would guarantee a secure and stable integration of both stablecoins and crypto-assets within the global financial system in a way that maintains the current trust and security in the digitally developing economy.

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