In its annual report released last week, the US financial stability oversight council (FSOC) has expressed concern over the unregulated cryptocurrency market, especially the stablecoins. It pointed out the possibility of some stablecoins not being completely pegged to the US dollar or any other currency as a primary concern.

“The reserves of these stablecoins, however, may not be subject to rigorous audits, and the quality and quantity of collateral may not, in some cases, correspond to the issuer’s claims,” FSOC said in the report.

“Likewise, stablecoins that maintain their value through algorithmic mechanisms are potentially subject to failure due to market pressures, operational failures and other risks,” it added.

The US council containing key financial regulators convened on Friday to discuss pressing issues, such as climate change, proposed rulemaking, LIBOR, and digital assets.

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FSOC also has a contingency plan if comprehensive regulations for the $127 billion stablecoin market are not enacted by congress. “The Council will also be prepared to consider steps available to it to address risks outlined in the

The report also highlighted the inherent risk from decentralised finance (DeFi) and other crypto activities like lending and trading.

But the report recognised how digital assets have continued to expand and hammered on the point that speculation still drives the digital asset market.

“It appears that speculation continues to drive the majority of digital asset activity, though it is unclear what percentage of transactions may directly tie to economic activity given the pseudonymous nature of many transactions,” it noted.

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Volatility and risks

The FSOC seems especially concerned about the digital asset volatility in the DeFi market. The FSOC explained how volatility in digital currency prices may lead to digital asset borrowers liquidating their positions to “meet minimum margin calls.” This could lead to tanking of a digital asset in the DeFi system. According to them, liquidations of one digital asset can spill over on other digital assets.

The report recommended that state and federal regulators “continue” their scrutiny of the cryptocurrency market and be on the lookout for any systematic risks.

The potential to benefit

FSOC also discussed the potential benefits of digital assets and stablecoins, outlining how stablecoins can be beneficial as payment tools. “Well-designed and appropriately regulated” stablecoins could allow for faster and better payments than current channels support,” the report stated.

The report also discussed how the financial innovation brought upon by technology can be beneficial to the customer, but at the same time, can pose serious risks too.

“New technology Financial Developments 125 and systems can help to evaluate and determine the creditworthiness of potential borrowers, benefiting financial institutions and customers by expanding access to credit and shortening the approval process. At the same time, automated processing of loan applications may introduce algorithmic biases when evaluating creditworthiness,” the report said.

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(Edited by : Yashi Gupta)