U.S. Regulators Raise Concern With Stablecoin Digital Currency

“If stablecoins are marketed with the claim that they will maintain a stable value, they may be subject to widespread redemptions and asset liquidations if investors doubt the credibility of that claim,” the report said.

Highlighting stablecoins in the report is the latest sign that more stringent risk-management standards could lie ahead for companies that issue the digital asset. The annual report is a wide-ranging assessment of risk in the financial system from a panel of regulators established following the 2007-09 recession. Friday’s report was the first released during the Biden administration and under Treasury Secretary

Janet Yellen,

who leads the council.

While the report said addressing potential financial-system risks related to climate change, nonbank financial institutions, such as money-market funds and open-end mutual funds, and Treasury market disruptions are the group’s top priorities, it outlined several potential risks from digital assets and stablecoins in particular.

A Treasury official said the council is hoping Congress will pass legislation providing an oversight framework for stablecoins, but that the regulators would be prepared to consider steps available to them in the future if lawmakers don’t act. The regulators haven’t set a timeline for when they might take their own steps absent Congressional action, the official said.

Stablecoins are issued by companies such as Tether Operations Ltd. and Circle Internet Financial Ltd. and are designed to combine the ability to trade quickly online like bitcoin with the stability of national currencies like the dollar. The council’s report noted that digital assets may “be subject to the risk of operational failures, fraud, and market manipulation“ and that prices are sometimes highly volatile because of speculative activity.

The council’s signal that it is willing to take a more active role in providing oversight of stablecoins follows a November report on the digital asset from a Treasury-led panel. That report recommended that Congress impose a new regulatory framework around stablecoins. It also urged the FSOC to consider steps to address potential risks from stablecoins, including possibly designating activities associated with the digital asset as or likely to become systemically important.

Climate change is also high on the regulators’ agenda. This year’s annual report is the first to identify climate change as an emerging threat to U.S. financial stability. The report also reiterated steps the panel’s members are taking to address that threat, including plans to strengthen what some companies publicly disclose about their own exposure to climate-related risks.

The regulators said they are also continuing to assess potential risks posed by nonbank financial institutions and periods of Treasury market disruptions.

The report said vulnerabilities in both these areas were highlighted during the financial-market stress that occurred at the beginning of the pandemic. The brief downturn in March 2020 caused the Treasury market to see a deterioration in liquidity as investors seeking to raise cash rushed to sell U.S. government bonds. Meanwhile, money-market funds and open-end mutual funds faced liquidation pressures at that time.

—Paul Kiernan contributed to this article.

Write to Amara Omeokwe at amara.omeokwe@wsj.com