Yellen urges stricter stablecoin regulation this year, amid TerraUSD crash

Dive Brief:

Treasury Secretary Janet Yellen called for more robust regulation of stablecoins during a Senate Banking Committee hearing Tuesday on the Financial Stability Oversight Council’s (FSOC) 2021 annual report to Congress.
Yellen pointed to this week's collapse in price of TerraUSD, an algorithmic stablecoin that lost parity with the dollar over the weekend and crashed to a low of 23 cents by Wednesday, according to CoinDesk, as evidence the stablecoin sector needs stricter regulation to prevent runs.
In response to a question by Sen. Pat Toomey, R-PA, Yellen said she believed “it would be highly appropriate” to pursue a goal of passing stronger stablecoin legislation this year.

Dive Insight:

In its annual report, the FSOC urged Congress to heed recommendations outlined in November by the President’s Working Group on Financial Markets, the Federal Deposit Insurance Corp. (FDIC) and the Office of the Comptroller of the Currency (OCC), and work at full tilt to establish a regulatory framework in the stablecoin sector.

"The president's working group has already described the risks we see in connection with one form of crypto assets which is stablecoins,” Yellen said Tuesday. “There we see run risks which could threaten financial stability, risks associated with the payment system and its integrity and risks associated with increased concentration, if stablecoins are issued by firms that already have substantial market power.”

To underscore the pressing need for stricter regulation, Yellen called attention to the recent crash of TerraUSD, the fourth-largest stablecoin according to CoinMarketCap, which saw its price drop precipitously around the time of the hearing.

Like other stablecoins, the price of TerraUSD is intended to remain pegged one-for-one to the price of the dollar. However, unlike Tether and USDCoin, which are backed by dollar reserves, TerraUSD relies on a financial algorithm.

Yellen pointed to the decline in price as indicative of broader instability in the stablecoin sector.

“I think [TerraUSD's collapse] simply illustrates that this is a rapidly growing product and that there are risks to financial stability, and we need a framework that's appropriate," Yellen said.

Toomey highlighted that the coin is "not backed by cash or securities, as the — if you can call them, more conventional — stablecoins [are].”

Yellen called for a stablecoin regulatory framework to be passed in 2022, as financial risk mounts while “the outstanding stock of stablecoins is growing at a very rapid rate.”

The hearing spotlighted a measure of agreement across the aisle on stablecoin regulation. Sen. Catherine Cortez Masto, D-NV, concurred with Toomey, saying “we do need a regulatory framework for stablecoins.”

But lawmakers took typically partisan stances regarding the FSOC’s priorities.

Toomey castigated the FSOC for focusing on climate change over cybersecurity. The Pennsylvania senator labeled the latter "a more imminent risk.”

Meanwhile, Sen. Elizabeth Warren, D-MA, called for FSOC to resume designating companies as systemically important financial institutions, a power the Trump administration limited in 2019.