US Lawmakers Push for Urgent Stablecoin Regulation — Fed Warns of Stablecoin Runs, Janet Yellen Cites UST Fiasco

Stablecoin

As U.S. lawmakers push for the urgent regulation of stablecoins, the Financial Stability Oversight Council (FSOC) and the Federal Reserve Board warn about the risks of stablecoin runs that threaten the country’s financial stability. Treasury Secretary Janet Yellen brought up the terrausd (UST) fiasco as an example of why a comprehensive regulatory framework is urgently needed.

Treasury Secretary Janet Yellen testifies before Senate committee

Stablecoins have become a hot topic in Washington. Following Monday’s terrausd (UST) fiasco, US lawmakers are calling for urgent regulation of stablecoins.

On Tuesday, U.S. Treasury Secretary Janet Yellen brought up UST as an example of a “stablecoin run” during her testimony before the Senate Committee on Banking, Housing, and Urban Affairs on the Financial Stability Oversight Council (FSOC) Annual Report.

Sen. Pat Toomey (R-Pa.) asked Yellen to confirm his view on the need to regulate stablecoins. “I would like to ask if you can confirm for the record here that you still believe it is important, I would even say urgent, that Congress pass legislation governing the regulation of payment stablecoins,” a- he declared.

Yellen replied:

Yes, I’m happy to confirm that, Senator Toomey.

She continued, “The President’s Task Force released a report concluding that current statutory and regulatory frameworks do not provide consistent and comprehensive standards for the risks of stablecoins as a new type of payment product, and urges Congress to pass legislation to ensure that stablecoins and these arrangements have a federal prudential framework.

The treasury secretary elaborated: “I would urge a bipartisan action to create such a framework. We would look forward to working with you.” She added:

There was a report this morning in the Wall Street Journal that a stablecoin known as terrausd [UST] experienced a run and had lost value.

“I think that simply illustrates that this is a rapidly growing product and there are risks to financial stability and we need a framework that’s appropriate,” Yellen stressed.

Toomey quickly replied, “It is important to note that the stablecoin you are referring to, I believe, is an algorithmic stablecoin. So that means, by definition, it’s not backed by cash or securities as – if you can call them – “more conventional stablecoins”.

The stablecoin terrausd (UST) lost its parity with the U.S. dollar and dropped to an all-time low of $0.66 per unit on Monday.

Financial Stability Oversight Board’s Annual Report Warns of Stablecoin Runs

The FSOC’s annual report also indicates that stablecoins can be vulnerable to risk. Noting that “the potential for increased use of stablecoins as a means of payment raises a range of prudential concerns,” the report states:

If stablecoin issuers do not honor a request to redeem a stablecoin, or if users lose confidence in a stablecoin issuer’s ability to honor such a request, runs on the arrangement could occur that may result in harm to users and the broader financial system.

Federal Reserve Board report on financial stability says stablecoins are subject to runs

The FSOC view on stablecoins is shared by the Federal Reserve. The Board of Governors of the Federal Reserve System released its semi-annual Financial Stability Report on Monday, similarly warning of stablecoin run risks.

Among the risks discussed in the report is “funding risks,” which “expose the financial system to the possibility that investors will ‘run’ by withdrawing their funds from a particular institution or sector,” the report details, elaborating:

Certain types of money market funds (MMFs) and stablecoins remain subject to races.

In addition, “The stablecoin sector continued to grow rapidly and remains exposed to liquidity risks,” the report notes.

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