Stablecoins have been a hot topic both on and off Capitol Hill. Earlier today, U.S. Treasury Secretary Janet Yellen called for regulation in her annual testimony before the Senate Banking Committee at a time when Terra’s algorithmic stablecoin, UST, struggles to remain pegged.
“New products and technologies can stimulate innovation and provide opportunities to increase efficiencies,” said Yellen. “However, digital assets can pose risks to the financial system, requiring increased and coordinated caution in regulation.”
Responding to questions from Senators Pat Toomey and Catherine Cortez Masto, Yellen said it would be “very appropriate” for stablecoin regulation to occur by the end of 2022 because “there are many risks associated with cryptocurrencies”.
“We really need a coherent federal system,” Yellen said. “I am really looking forward to working together. [Toomey] And to members of Congress to devise legislation that will achieve it.”
Stablecoins, by definition, must be stable and maintain a 1:1 ratio in value, which can be pegged to an external peg such as the US Dollar or linked to other assets such as the UST. Bitcoin and the avalanche.
All stablecoins in circulation are backed by a $1 reserve, but there are concerns about the validity of some stablecoins recently. For example, the algorithm-based stablecoin UST fell 35% from its 1:1 dollar peg on May 9th.
“The stablecoin known as TerraUSD has plummeted and has lost its value,” Yellen said. “I think this is simply to show that this is a fast-growing product and there is a rapidly growing risk.”
Although the UST rebounded almost completely from the steep decline on May 9, it recovered back from the $1 level to around $0.91, but it still hasn’t fully returned to a “stable” state. Doo Kwon, founder of Terraform Labs, the organization behind UST, cryptocurrency LUNA, and Luna Foundation Guard (LFG), tweeted that he was “imminent to announce a recovery plan for $UST” but did not provide further details. publication time.
“The stablecoin sector continues to grow rapidly and is exposed to liquidity risks,” the Fed said in its May 9 report.
The total value of stablecoins has surged over the past year to about $180 billion in March 2022, and the three largest stablecoins – Tether, USD Coin (USDC) and Binance USD – account for more than 80% of the total market value. the report added.
Yellen said the U.S. Treasury Department plans to release a report on cryptocurrencies and stablecoins “soon” and plans to draft “very appropriate” legislation for fixed assets by the end of 2022.