Yellen Echoes Stablecoin Warning Citing UST Crash

Key Takeaways

  • Treasury Secretary Janet Yellen has once again said that the US needs to regulate the stablecoin market.
  • Yellen noted UST’s recent depended event in which the stablecoin crashed amid volatility in the market.
  • She also hinted that a framework could be established before the end of the year.

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US Treasury Secretary Janet Yellen has called on Congress to pass stablecoin legislation, referencing UST’s recent depended event.

Yellen Highlights Stablecoin Risks

Stablecoins are facing increased scrutiny from the US Treasury.

In a May 10 hearing, Treasury Secretary Janet Yellen has once again stressed the need for a stablecoin regulatory framework. Speaking in response to pro-crypto Senator Pat Toomey, Yellen said that the current regulatory frameworks “do not provide consistent and comprehensive standards for the risks of stablecoins.” She added that she would welcome bipartisan action to establish a framework, adding that the Treasury would work with Congress on introducing regulations.

She drew specific reference to the recent depeg of the algorithmic stablecoin TerraUSD, stating that the case highlights the “risks to financial stability” stablecoins can pose and that the US needs to establish an appropriate framework to regulate the market. “I do think it’s important to note that the stablecoin to which you refer, I believe, is an algorithmic stablecoin, and so that means by definition it’s not backed by cash or securities as the, if you can call them, more conventional stablecoins, ”Responded Toomey, before asking if she thought regulation would be likely before 2022 is out. Yellen said she thinks establishing a framework before the end of the year would be “highly appropriate.”

TerraUSD, more commonly referred to as “UST,” is an algorithmic stablecoin developed by Terraform Labs. Instead of holding dollar reserves to ensure its peg, UST relies on market forces to dictate its price. It works in tandem with Terra’s volatile token, LUNA. Users can burn $ 1 worth of LUNA to mint 1 UST, and vice versa, which theoretically ensures its price tracks the dollar. However, UST’s dollar peg has proven itself to be vulnerable during periods of high market volatility, such as yesterday’s market drawdown that saw Bitcoin briefly dip below $ 30,000. UST traded as low as $ 0.62 on Binance and has somewhat recovered, but it’s still about 10 cents short of its peg at press time.

Today is not the first time Yellen has referenced UST while calling for stablecoin regulation. During a speech at the American University in Washington, DC on Apr. 9, she mentioned that a stablecoin had lost its peg during the May 2021 crypto market crash. Although she did not directly cite UST, it was the only stablecoin to drop below $ 1 during the correction.

More generally, Yellen has stated that her primary focus regarding crypto assets is to regulate stablecoins to protect consumers. She has frequently highlighted that no official legislation currently ensures that dollar-backed stablecoins such as USDT can be converted back into dollars. While algorithmic stablecoins such as UST do not fall under this purview, they typically use the dollar as a unit of account, which is likely to attract the attention of US regulators in the future.

Disclosure: At the time of writing this piece, the author owned ETH, LUNA, and several other cryptocurrencies.

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