Two days after the hugely successful stock market listing of stablecoin issuer Circle, the Chair of the Financial Stability Board (FSB), Klaas Knot, reiterated the risks of stablecoins. The Financial Stability Board (FSB) monitors and makes recommendations about the global financial system. Mr Knot acknowledged the ability of stablecoins to address some of the challenges of cross border payments, but highlighted that they also introduce risks. “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. One of his key concerns is the increasing use of short term money market instruments as stablecoin reserves. Should a stablecoin collapse causing fire sales of short term bills, this could impact the stability of the mainstream financial system. The FSB Chair highlighted how a failure could come to pass. “Without strict oversight, could these reserves fund riskier ventures, with stablecoins acting as conduits for leveraging the financial system? This scenario is not hypothetical. We have seen how loosely regulated financial instruments can amplify risks rather than mitigate them.” His concern is that despite stablecoins resembling bank deposits or money market funds, in some jurisdictions they are outside the regulatory perimeter. The FSB made its latest high level stablecoin recommendations in 2023. But Mr Knot warned of regulatory arbitrage. “We should not allow stablecoins to exploit gaps in oversight to gain a competitive advantage or to introduce hidden risks into the financial system,” he said.