On December 17, 2021, the Financial Stability Oversight Council (“FSOC”) – a collaborative body formed under the Dodd-Frank Act composed of state and federal regulators and tasked with identifying risks and responding to emerging threats to financial stability – released its 2021 Annual Report (the “Report”). In the Report, the FSOC offered wide-ranging insight into what it perceived to be various vulnerabilities in the financial system and related regulatory concerns on topics ranging from climate-related financial risks, the real estate market, certain financial structures, data challenges, and cybersecurity. Notably, the FSOC additionally dedicated a section of the Report on the specific risks digital assets pose to the financial system, specifically, those involving stablecoins.
Stablecoins are digital assets designed to maintain a stable value by pegging the digital asset to a national currency or another reference asset (i.e., a commodity like gold, silver, or oil). Using reference assets to stabilize price, stablecoins seek to become the alternative payment mechanism to bitcoin and other cryptocurrencies, and have also been used to facilitate trading and lending of other digital assets. However, the FSOC, taking a systemic, wide view, is not without concern.