Stablecoins have been a hot topic both on and off Capitol Hill. Earlier today, US Treasury Secretary Janet Yellen pushed for regulation during an annual testimony in front of the Senate Banking Committee, at a time where Terra’s algorithmic stablecoin UST struggles to retain its peg.
“New products and technology may present opportunities to promote innovation and increase efficiencies,” Yellen said. “However, digital assets may present risks to the financial system and increased and coordinated regulatory attention is necessary.”
In response to questions from Senator Pat Toomey and Senator Catherine Cortez Masto, Yellen said it would be “highly appropriate” for stablecoin regulation to occur by the end of 2022 because there are “many risks associated with cryptocurrencies.”
“We really need a consistent federal framework,” Yellen commented. “I really look forward to working with [Toomey] and members of congress to devise legislation that would accomplish that.”
Stablecoins by definition are supposed to be stable and hold their value through a 1:1 ratio that is fixed to an external peg like the US dollar or it can be tied to other assets like UST, which is backed by dollars, but also cryptocurrencies like bitcoin and Avalanche.
While every stablecoin in circulation is backed by $1 equivalent in a reserve, there have been concerns recently about the validity of some stablecoins. For example, the algorithmic-based stablecoin UST fell as much as 35% from its 1:1 dollar peg on May 9, when it should technically never be away from the $1 amount.
“A stablecoin known as TerraUSD experienced a run and declined in value,” Yellen said. “I think that this simply illustrates that this is a rapidly growing product and there are rapidly growing risks.”
Although UST has almost fully rebounded from its steep drop on May 9, back near its $1 levels to about $0.91, it’s still not fully back to its “stable” state. Do Kwon, the founder of Terraform Labs, which the organization behind UST, cryptocurrency LUNA, and Luna Foundation Guard (LFG), tweeted that he was “close to announcing a recovery plan for $UST,” but hasn’t provided further details by the time of publication.
“The stablecoin sector continued to grow rapidly and remains exposed to liquidity risks,” the US Federal Reserve said in a report on May 9.
The aggregate value of stablecoins spiked over the past year to about $180 billion in March 2022 and the three largest stablecoins – Tether, USD Coin (USDC) and Binance USD – make up over 80% of the total market value, the report added.
The US Treasury plans to release a report on cryptocurrencies and stablecoins “shortly” and plans to create “highly appropriate” legislation for the pegged asset by the end of 2022, Yellen said.