Outgoing FSB Chief Warns About Looming Systemic Stablecoin Risk

• Outgoing FSB chief Klaas Knot has warned that stablecoins pose a looming financial stability risk.
• Firms like Circle and Tether now hold billions of dollars worth of U.S. Treasuries.
• A run on a major stablecoin risks placing huge stress on the Treasury market, Knot cautioned.

In one of his final public appearances as chief of the Financial Stability Board (FSB), Klaas Knot has warned about a looming risk to financial stability created by stablecoins.

With a combined market cap of more than $250 billion, stablecoins are now a powerful force in the treasury market.

Should there be a mass selloff, it could place enormous stress on the mainstream financial system, Knot argued.

Stablecoins and the Treasury Market

Speaking in Madrid on Thursday, June 12, Knot said “crypto does not yet pose a systemic risk,” but “we may be approaching a tipping point.”

Knot’s concerns primarily center on the “substantial amounts” of U.S. Treasuries now held by companies like Circle and Tether.

While still behind the largest money market funds, these firms are fast closing the gap, and now hold more U.S. government bonds than some small countries.

This is significant because stablecoins remain a relatively immature financial instrument. However, if adoption continues to grow at its current rate, the largest coins may reach trillions of dollars in circulation.

Adoption Uncertain, but Risks are Clear

The biggest potential growth driver for stablecoins is cross-border transfers.

Compared to the roughly $5 trillion per day processed by SWIFT, stablecoin volumes in the tens of billions are still tiny.

As Knot, who is also the governor of the Dutch central bank, acknowledged on Thursday:

“A key question stands out: will stablecoins replace traditional bank-based cross-border payments, or will they remain a niche solution in a fragmented global payments ecosystem?”

“While the answer is unclear, the potential risks are not,” he said.

More Oversight Needed

The risks highlighted by Knot are heightened by the fact that many jurisdictions still don’t regulate stablecoin issuers.

“Without strict oversight,” issuers can’t be trusted not to engage in risky behavior, he cautioned.

“This scenario is not hypothetical. We have seen how loosely regulated financial instruments can amplify risks rather than mitigate them.”

With financial stability hawks increasingly focused on stablecoin risks, efforts to regulate the sector have gained momentum.

In the U.S., the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act cleared an important vote in the Senate on Wednesday, June 11.

After years of dragging their feet on the issue, American lawmakers may finally pass a stablecoin bill through the upper chamber as early as next week.