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

While U.S. lawmakers are pushing for urgent regulation of stable coins, the Financial Stability Oversight Council (FSOC) and the Federal Reserve Board have warned of the risks of launching stable coins that threaten the nation’s financial stability. Treasury Secretary Janet Yellen cited the terrausd (UST) fiasco as an example of why a comprehensive regulatory framework is urgently needed.

Treasury Secretary Janet Yellen testifies before a Senate committee

Stable coins have become a hot topic in Washington. After Monday’s terrausd (UST) fiasco, U.S. lawmakers are calling for urgent regulation of stable coins.

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

Sen. Pat Toomey, R-Pa. asked Yellen to confirm her view that stablercoin regulation is needed. “I wanted to ask if you could confirm for the record that you still think it’s important, I would say even urgent, that Congress pass legislation to regulate payment stablecoins,” he said.

Yellen responded:

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

She continued: “The President’s Working Group issued a report concluding that the current legislative and regulatory framework does not provide consistent and comprehensive standards for the risks of stable coins as a new type of payment product, and calling on Congress to pass legislation to ensure that stable coins and similar mechanisms have a federal prudential framework.”

The Secretary of the Treasury clarified, “I would call for bipartisan action to create such a framework. We would be happy to work with you.” She added:

The Wall Street Journal reported this morning that the stable coin known as terrausd [UST] has experienced a runaway decline in value.

“I think it just illustrates that this is a fast-growing product, and there are risks to financial stability, and we need an appropriate framework,” Yellen stressed.

Toomey was quick to respond, “It’s important to note that the stabelcoin you refer to, I believe, is an algorithmic stabelcoin. This means that by definition it is not backed by cash or securities like – if you can call them that – ‘more traditional stablecoins.'”

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

The Financial Stability Oversight Council’s annual report warns of a run on stablecoin

The FSOC’s annual report also states that stable coins may be vulnerable to run risks. The report notes that “the potential to expand the use of stable coins as a means of payment raises a number of prudential concerns.”

If stable coin issuers fail to comply with a stable coin redemption request or if users lose confidence in the stable coin issuer’s ability to comply with such a request, there could be a breakdown in the agreement, which could result in harm to users and the broader financial system.

The Federal Reserve’s Financial Stability Report states that stable coins are prone to runaway

The FSOC’s view of stable coins is shared by the Federal Reserve. The Board of Governors of the Federal Reserve System released its semi-annual Financial Stability Report On Monday, the Board of Governors of the Federal Reserve System released its semi-annual Financial Stability Report, in which it also warned of the risks associated with the use of stable coins.

Among the risks discussed in the report are “funding risks” that “expose the financial system to the risk that investors will ‘flee’ by withdrawing their funds from a particular institution or sector,” the report said:

Some types of money market funds (MMFs) and stable coins are still vulnerable to flight.

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

What do you think of Treasury Secretary Yellen’s comments and warnings from the Federal Reserve and the Financial Stability Oversight Council regarding stable coins. Let us know in the comments section below.

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