FSOC warns about the risks of the stablecoin market: excessive centralization of the issuers

According to the “United States Financial Services Oversight Council” (FSOC), the stablecoin sector presents risks that should not be underestimated.

The main issue concerns the centralization component of the companies that issue this kind of cryptocurrencies.

In fact, it is estimated that 70% of the value of the entire market is controlled by a single company, 

Let’s see all the details below.

FSOC: the stablecoin market is excessively concentrated around a few players

According to the United States federal government organization FSOC, there are potentially destructive risks within the stablecoin market.

In its annual report of 2024, the Supervisory Council warned of a concentration factor affecting a large portion of this crypto niche.

In particular it was written as Tether, a company legally based in the British Virgin Islands, controls 70% of the market.

USDT actually represents the stablecoin with the largest circulating supply, amounting to 138 billion units, more than all the other issuers combined. 

It is the one with the most liquidity and depth for exchanges with other currencies, primarily adopted as a stable asset for cryptocurrency trading.

This situation according to the FSOC generates worrying risks not only for the crypto industry, but for the entire financial stability of the country.

FSOC goes out swinging about stablecoins, ratcheting up its criticism of *all* #stablecoin issuers (Biden/Warren #finreg has indeed been ratcheting up its anti-#crypto dragnet on the way out). It'll be fun to compare this language with the first post-Trump 47 FSOC report… pic.twitter.com/aTnVUUegvs

— Caitlin Long (@CaitlinLong_) December 6, 2024

Without personally mentioning Tether, the federal entity stated that if its market dominance continues to expand, there could be serious consequences in the event of failure.

Here is what is written verbatim in the report:

“its failure could disrupt the cryptocurrency market and create ripple effects for the traditional financial system”.

In Europe Tether is already considered “illegal”, after the recent MiCa regulation imposed very restrictive rules for token issuers.

Some exchanges have already taken the initiative to delist the asset, citing regulatory pressure and threats from regulators.

Stablecoin: risks of centralization and future challenges in regulation

The risks of centralization in the stablecoin market are amplified if we consider that Tether does not operate in compliance with a comprehensive regulatory framework.

The company, despite not having committed any crime so far, appears as lacking transparency in the eyes of the FSOC.

According to the report, it also emerges how it lacks third-party audits that can serve as a guarantee against hack or dramatic events.

The Federal Council suggests further regulating the stablecoin sector, requiring issuers to make financial reports public

“Although some are subject to state-level supervision requiring regular reporting, many provide limited verifiable information about their holdings and reserve management practices”.

Furthermore, the FSOC has urged the United States government to act quickly and to develop a new regulatory framework for stablecoins.

Resuming the potential negative effects of the risks of stablecoins, and citing the case of TerraUSD (UST), the Council calls for a “comprehensive prudential framework”.

The same authority has threatened that it will consider measures and weapons at its disposal to tackle the problem if actions are not taken.

“The Council recommends that Congress pass a law creating a comprehensive federal prudential framework for stablecoin issuers to address run risk, payment system risks, market integrity, and investor and consumer protection”.

At the same time, the CEO of Tether, Paolo Ardoino, publicly stated that overly strict regulation could in turn threaten the stability of the crypto sector.

The introduction of the recent regulation Mica is a fitting example, with token issuers that must necessarily hold 60% of the reserves at European banks.

This condition could lead to serious systemic risks, considering that the reserves of stablecoins can be lent up to 90% by the same banks.

Stablecoin reserves at all-time highs on exchanges

Risks and regulation aside, we find it interesting to report the metric of stablecoin reserves on exchanges.

According to the data from CryptoQuant, currently within CEX there are more stablecoins than have ever been seen in 10 years.

In total, we find 44 billion stablecoins as reserve assets of the crypto exchanges, ready to be spent.

The most curious thing to note is that since June 2023 these reserves have exploded to the bull side, increased by about 27 billion dollars up to today.

However, the real boom occurred from November onwards, thanks to the positive push from Donald Trump who brought 17 billion dollars in stablecoin as inflow.

Usually, such situations precede a bullish phase of the market, with stablecoins being used to purchase speculative assets.

We expect a new bull run from here until the coming months.

Source: https://cryptoquant.com/asset/stablecoin/chart/exchange-flows/exchange-reserve?exchange=all_exchange&window=DAY&sma=0&ema=0&priceScale=log&metricScale=linear&chartStyle=line