Secretary Yellen; UST Collapse Could Have Been Avoided With The Available Legal Framework

The ongoing crypto market turmoil and the de-pegging by two of the largest stablecoins earlier this week has caught the attention of regulators, particularly Treasury Secretary Janet Yellen.

Testifying before the House of Representatives Financial Services Committee Thursday, Yellen brought up the issue of UST and USDT noting stablecoin issuers needed to be brought under existing financial regulations.

“We’ve just had over this last week with Terra and with Tether an illustration of the risks associated with stablecoins,” Yellen said. “We invented a good regulatory framework for dealing with this, and that is a federally insured depository institution.”

She went on to cite a November joint report from the President’s working group on Financial Markets (PWG), the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) which recommended that stablecoin issuers should be regulated under the same rules as banks.

“To address risks to stablecoin users and guard against stablecoin runs, legislation should require stablecoin issuers to be insured depository institutions, which are subject to appropriate supervision and regulation, at the depository institution and the holding company level,” the November 2021 report read.

Although she stated that stablecoins de-pegging was not yet posing a “real threat to financial stability,” she noted that threats posed by digital assets were growing rapidly and that they represented the same risks associated with bank runs.

Yellen’s comments come on the heels of another sitting on Tuesday where she told the Senate Banking Committee that digital assets, particularly stablecoins posed “significant risks” to financial stability.

She called on Congress to work on stablecoin legislation stating that getting this done before 2022 ends was “highly appropriate”. Meanwhile, Yellen stressed that the Treasury is working on a comprehensive report on cryptocurrencies and stablecoins as part of a request from the President’s Working Group on Financial Markets (PWG), which will be issued shortly.

Stablecoins, more so algorithmic ones such as Terra’s UST have encountered run-ins with regulators who believe that they are too risky since they are issued by firms that already have substantial market power and are highly vulnerable to de-pegging. 

US senator Elizabeth Warren has previously raised concerns over the growing risk posed by stablecoins calling for a clampdown before it’s too late.

“Stablecoins have no regulators, no independent auditors, no guarantors nothing. And they are propping up one of the shadiest parts of the crypto world-the place where consumers are least protected from getting scammed.” Warren said.