U.S. interagency report: Risks and recommendations on stablecoins

The U.S. agencies released a report on stablecoins, identifying potential risks that consumers should be aware of and making corresponding recommendations. The staff of these agencies consulted major market participants, trade association members, experts and advocates. The report believes that legislation is the ultimate way out, but proposes temporary solutions.

With a market capitalization of $133 billion that is too big for regulators to ignore, a coalition of institutions is racking their brains to chart a path for the growing stablecoin sector.

The 26-page inter-agency report released by the Treasury Department together with other regulators stressed the importance of stablecoins in the ecosystem. The group, known as the President’s Working Group on Financial Markets, noted in its report that “stablecoins are primarily used to facilitate the trading, financing, and lending of other digital assets.”

The current market capitalization of stablecoins is around $133 billion, with the largest being Tether’s USDT, which has a market cap of $70 billion. This figure has increased by 500% in the past 12 months, and their adoption continues to soar along with DeFi and digital asset trading.

At the same time, the report acknowledges that stablecoins have inherent risks, including "the impact of SEC and CFTC jurisdiction." The composition of stablecoins may include securities, commodities, and derivatives, which may cause some confusion as regulatory boundaries become blurred. Other risks identified include loss of value caused by stablecoin operations and payment system risks. Operational risks come from "information system or internal process defects, human errors, management failures, or external events."

The report highlights three policy issues that may arise when stablecoins are scaled up. The first is the obvious systemic risk that the failure of entities poses to the economy, the second is the problem of "excessive concentration of economic power". The third is the anti-competitive effects that may arise from expanding operations.

The report makes several recommendations to try to reduce the risks of using stablecoins, including comprehensive legislation, interim measures and increased cooperation with international financial organizations.

“To address these gaps, the stablecoin space requires a consistent and comprehensive regulatory framework that increases transparency on key aspects of stablecoins and ensures that stablecoins can function both in normal times and under conditions of market stress,” the report states.

At the same time, it urged Congress to take immediate action to "ensure that payment stablecoins are subject to appropriate federal oversight on a consistent and comprehensive basis." In the absence of congressional action, the interim measures will enable agencies to strengthen coordination and cooperation on issues where they have common interests.

Despite the lack of regulation, institutions have played a role in reducing the risks associated with stablecoins. Last month, the U.S. Commodity Futures Trading Commission ordered Tether to pay a fine for misleading statements about the basis of USDT. Similarly, Circle, the issuer of USDC, revealed in October that it was under investigation by the U.S. Securities and Exchange Commission. (Blockchain Knight)