The rapid growth in cryptocurrencies such as stablecoins and decentralized finance [deFi] is an “important potential emerging vulnerability” according to a Friday report released by a US leading regulatory group called The Financial Stability Oversight Council or FSGOC. In their annual report, the Financial working group brought into focus some key issues pertaining to the stablecoins and the digital asset market as a whole.
One of them is stablecoin’s ability to maintain a peg to the dollar or other currency and its capability to withstand market pressures or other operational failures. Another issue that was highlighted beyond stablecoins is the development and the risk factor arising from decentralized finance [DeFi] and other crypto-related activities, such as lending and exchange.
On the trading aspect, FSOC expressed doubts over the concept that the extremely volatile asset category can be an effective instrument for investment despite some “Watershed moments” on Wall Street, this year. In fact, it stated that these crypto-assets are purely driven by speculations and are often vulnerable to serious security breaches. The report cited incidents such as rug pulls and hacks that saw more than $7.7 billion resources being drained out in a span of 12 months, referring to research led by blockchain data platform Chainalysis.
The FSOC’s latest review comes after the US President’s Working Group on Financial Markets [PWG] released a similar report last month outlining the risks of stablecoins. Members of the committee have recommended that only banks be allowed to issue stablecoins and further called Congress to bring forward a new regulatory framework to manage the asset class.
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But all hope is not lost. Despite taking a critical stance, the report did emphasize its positive aspects of the digital assets market. It mentioned that stablecoins and other digital assets could facilitate a faster and better payments process than current channels support if they are ‘well-designed and appropriately regulated’. Reading along similar lines, the report noted,
“Digital assets are a prominent example of financial innovation that present potential benefits and risks. Regulatory attention and coordination are critically important in light of the quickly evolving market for these assets.”