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US Treasury Secretary Janet Yellen called for far greater regulation of the stablecoin market amid last week’s unprecedented TerraUSD (UST) volatility.
The popular algorithm-backed stablecoin was supposed to maintain a value of one dollar, but on May 16 it fell to just 9 cents. Previously, Janet Yellen spoke quite positively and optimistically about the stablecoin market and its potential for financial innovation and inclusion.
Her remarks about stablecoins were especially hopeful given her long-standing criticism of crypto-assets for their volatility and huge market risk.
Speaking before the Senate Banking, Housing and Urban Affairs Committee, Yellen said she “wouldn’t characterize it on this scale as a real threat to financial stability, but they are growing very quickly.”
Yellen also noted that the collapse of the UST has many similarities to the risk of bankruptcy in the traditional market – where a large group of people pull their money out of the bank at the same time, usually resulting in the collapse of the financial institution.
Stablecoins have become a favorite crypto-asset for policymakers and regulators around the world – but most notably in the United States. Namely, last year the President’s Working Group (PWG) published its report on the prospects of stablecoins. However, between the PWG report and Yellen’s previous statements, there is rarely a distinction between stablecoins that are algorithmically backed versus the commodity support drawn by the people in charge of developing the framework for these assets.
It is not unreasonable to assume that the “stable” in the term “stablecoin” lends some kind of credibility to the actual stability of the asset. While many commodity-backed stablecoins, such as Circle’s US dollar-pegged USDC, are largely immune to large price fluctuations, the collapse of the UST stablecoin last week raises questions about what should be done next — both by regulators and everyone else .
To be clear, both UST and USDC should be pegged to the price of the US dollar to moderate overall price volatility. What differentiates them is that while USDC is backed by real US dollar reserves, UST instead used algorithms along with several billion dollars worth of Bitcoins to maintain its price.
The problem is that Bitcoin is incredibly volatile. When billions of USTs were sold last week – perhaps due to market volatility or perhaps some other reason – the price dropped to 91 cents.
When UST was no longer a stable asset to hold – also known as losing its fixity – investors scrambled to dump the coin, causing the price to drop further. This rapid selloff is what Yellen compared to running a bank during her testimony before the Senate Banking Committee last week.
Investors in Luna, UST and Bitcoin all lost incredible amounts of money as a result of last week’s total crash. Earlier this year, reports noted that nearly half of all Bitcoin investors were in the red and reported losing money.
While regulators will likely be hoping for a quick move to codify further safeguards for the cryptoasset market, everyday investors can be empowered by research and a strong understanding of the risks they may face.
In Secretary Yellen’s written testimony to the Senate Banking Committee, she writes: “With respect to digital assets, new products and technologies can present opportunities to promote innovation and increase efficiency. However, digital assets may pose a risk to the financial system and increased and coordinated regulatory attention is necessary. On March 9, 2022, President Biden signed an executive order calling for a comprehensive approach to digital asset policy. The Council is working on a report that will identify financial stability risks and regulatory gaps. I look forward to working with you on the issues and opportunities presented by digital assets.” Yellen also noted that she hopes further regulation will be introduced as early as this year.
EU lawmakers are calling for a ban on large stablecoins
According to a leaked European Commission document, its members are calling for greater rules that would prevent the widespread use of stablecoins instead of fiat currencies — a framework that largely echoes previous concerted efforts by regulators against Facebook’s proposed Libra project.
The views expressed in this document are even stricter than those previously expressed by the European Parliament, which called for stable coins to be reclassified and placed under the jurisdiction of the European Banking Authority.
Although this document would technically be classified as a “non-paper” – meaning it does not reflect an official or formal position – it provides significant clarity on where European lawmakers are headed with regard to the stablecoin market and even the broader crypto-asset market. .
SEC summons crypto exchanges
The Securities and Exchange Commission (SEC) made headlines earlier this year after it hired nearly two dozen employees to focus on the crypto market and expand the agency’s enforcement and investigative capabilities. These employees effectively doubled the agency’s Crypto Asset and Cyber unit in just one week. Not surprisingly, the SEC has earned a reputation as the strictest agency when it comes to the rules governing the emerging digital asset space.
Now, the SEC is calling out crypto exchanges that trade against their clients — sometimes offering different services that are actually in direct conflict with each other. SEC Commissioner Gary Gensler noted during an interview with Bloomberg last week that, “Crypto has a lot of these challenges – platforms that trade in front of their clients. In fact, they often trade against their customers because they trade with their customers.”
Regulation Stablecoins Crypto Businesses
