‘Regulate stablecoins or we will,’ FSOC tells US Congress

The Financial Stability Oversight Council (FSOC) has released its annual report for 2021, and digital currencies featured significantly. The federal organization called on Congress to regulate stablecoins or it would have to step in and do it, while raising concern on the rise of decentralized finance (DeFi).

Established in 2010 by President Barack Obama, the FSOC identifies and monitors excessive risks to the U.S. financial system, mostly arising from financial institutions.

In its report, the Council pointed out that digital assets and the associated distributed ledger technology present the opportunity to promote innovation and further modernization. However, regulatory attention and coordination are critically important, especially given how quickly adoption is rising.

Stablecoins stand out as the sector that concerns the Council the most. It claimed to have reviewed the Report on Stablecoins which was prepared by the President’s Working Group two months ago. This report called for quick regulations of stablecoins to prevent a stablecoin run and recommended that stablecoin issuance should be delegated to regulated institutions only.

FSOC called on its members to consider appropriate actions within their jurisdictions to oversee the sector. These members include the chair of the Federal Reserve, the Comptroller of the Currency, the SEC, the CFTC and the FDIC.

And if Congress doesn’t follow up on the recommendations of the Report on Stablecoins, the FSOC will be ready to step in, the report said.

“The Council will also be prepared to consider steps available to it to address risks outlined in the PWG Report on Stablecoins in the event comprehensive legislation is not enacted.”

The latest report comes at the end of a year in which stablecoins have seen explosive growth, in some cases raising eyebrows and in others, even breaking financial laws. Tether, the market leader, has printed $56 billion in USDT this year alone, over two and a half times its value from inception to end of last year. Data shows that the entire stablecoin market has grown by 388% this year.

FSOC also expressed concern towards DeFi, yet another sector that has shot up this year. The Council believes that giving retail investors access to the high leverage that most DeFi platforms offer is risky and can lead to a collapse of the market if prices dip significantly.”

“The use of leverage to obtain exposure to highly volatile digital assets increases the risk of a fire sale in the underlying asset: a decrease in asset values could trigger a cycle of sales to meet margin calls and further price declines, possibly spilling into other digital assets.”

Watch: CoinGeek New York panel, Tokenized Assets: Stablecoins and Custody with BSV

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