Key Takeaways:
- FSOC Flags Stablecoins as “Potential Risk” to Financial Stability.
- High market concentration and lack of appropriate regulatory frameworks are critical challenges.
- Urges comprehensive federal regulation of stablecoins due to their systemic risks.
Stablecoin Market is Highly Concentrated
In recent years, the U.S. Financial Stability Oversight Council (FSOC) has identified that the market for stablecoins is concentrated, with a single company holding about 70 percent of the sector’s total market value.
Tether holds about 70% of the stablecoin’s market value
Stablecoins play an indispensable role in the provision of liquidity both in the cryptocurrency market and DeFi protocols. In addition, they reduce the price volatility seen in any other cryptocurrency while offering a much more stable means of transacting. Yet, with this dependency falling on only a few more dominant coins, their security and feasibility become increasingly under question within such volatile times.
As the use of stablecoins for both transactions and investments continues to increase, the need for a clear and effective regulatory framework has never been more urgent. Efficient regulation would protect investors and ensure future stability in the financial system.
The total market capitalization of the stablecoin market is valued at $205.48 billion, where Tether represents about 66.3% of the figure, with $136.80 billion, per CoinMarketCap.
Although FSOC did not name the company, it warned that if this dominance continues to grow, its failure could disrupt crypto-asset markets and create spillovers to the traditional financial system.
In September, investors concerned that Tether did not publish third-party audits increased its vulnerability to a liquidity crisis similar to the FTX collapse.
More News: Tether to launch British Pound Sterling (GBP)-pegged token in early July
Stablecoins Challenge “Efficient Market Regulation Mechanisms”
Stablecoins present significant challenges to “efficient market regulation mechanisms.” The report also uses the high market concentration of a few stablecoins as evidence of flaws in the system’s structure. This was well underlined by the 2022 collapse of TerraUSD, or UST, which showed that the stability promised by their issuers is not always maintained by stablecoins.
In May 2022, the stablecoin TerraUSD lost its peg to the U.S. dollar in a few days after $2 billion was withdrawn. What was supposed to maintain a 1:1 value with the…
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