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

The Financial Services Oversight Council (FSOC) is urging Congress to pass legislation that establishes a comprehensive federal framework for regulating stablecoin issuers.

A government organization — established by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 — published a report on Friday, Dec. 6, detailing what it perceives as a growing threat to the U.S. financial system.

Stablecoins, the FSOC says, “continue to represent a potential risk to financial stability because they are acutely vulnerable to runs absent appropriate risk management standards.”

The sector also remains largely concentrated, with a single firm accounting for “around 70 percent of the sector’s total market value,” council stated, referring to Tether (USDT).

Why Tether is problematic

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

While the FSOC report did not mention any company names, it cautioned that the lack of risk management standards with firms involved with stablecoins makes the sector “vulnerable to runs.” And Tether has faced scrutiny for not providing audits to verify that its coin is backed 1:1 by U.S. dollars or other assets.

Critics argue that if Tether does not hold sufficient reserves, it could collapse, causing a major disruption in the crypto market. ng up over 70% of the $204 billion market.

In a Sept. 14 social media post, Cyber Capital founder Justin Bons criticized Tether for its “lack of third-party audits,” calling the stablecoin an “existential threat to crypto.” See below.

Previously, the firm settled charges alleged by the U.S. Commodity Futures Trading Commission in 2021 for making “untrue or misleading statements” about the reserves backing its stablecoin.

Stablecoins have also faced heightened scrutiny since the collapse of TerraUSD (UST). Once a prominent stablecoin, UST lost its dollar peg in May 2022, triggering a catastrophic death spiral that wiped out over $40 billion in value from the crypto market.

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

Specifically, the FSOC warned that if the market dominance expands, its potential failure could “disrupt the crypto-asset market” and trigger “knock-on effects” for the broader financial system.

A few stablecoin issuers are under state-level supervision, but many “operate outside of, or in noncompliance with, a comprehensive federal prudential framework.”

Further, it added that these firms often provide “limited verifiable information” about their reserves and holdings, making it difficult to ensure “effective market discipline.”

Calls for legislative action 

The FSOC recommended passing stablecoin regulations to alleviate risks. It urged Congress to develop “a comprehensive federal prudential framework for stablecoin issuers” and provide federal financial regulators with explicit rulemaking authority over the crypto-asset spot market. 

“If comprehensive federal legislation is not enacted, Council members remain prepared to consider steps available to them to address risks related to stablecoins,” it added.

This is not the first time the FSOC has pushed for such measures; similar recommendations were made in its 2023 annual report.

Congress is currently reviewing the Clarity for Payment Stablecoins Act, a bill aimed at establishing clear regulations for stablecoin issuers. While the legislation has yet to pass the House, crypto proponents believe it could progress under the incoming Trump administration.

Meanwhile, concerns over stablecoins extend beyond the U.S. On Dec. 4, the Australian Securities and Investments Commission published a consultation paper outlining plans to enhance oversight of the stablecoin sector.

Similarly, Banco Central do Brazil (BCB) has raised concerns about the risks stablecoins pose and has proposed banning withdrawals to self-custody wallets as part of efforts to tighten regulatory oversight.