Treasury Secretary Janet Yellen Calls for Stablecoin Legislation

Treasury Secretary Janet Yellen in a hearing today called for the regulation of stablecoins within the next year. Secretary Yellen said that although crypto may “promote innovation,” it could also “present risks to the financial system.”

Secretary Yellen pointed towards Terra, a blockchain that native stablecoin UST, slid below its supposed dollar peg to $0.65.

Stablecoins are cryptocurrencies that are in theory, supposed to be stable. They are usually pegged to popular fiat currencies like the US dollar and euro, or gold, and are pivotal to a lot of cryptos ecosystems.

They are also what most traders use to get in and out of plays, typically selling out of cryptos into a stablecoin.

The problem with UST unlike other stable coins (such as Tether and USDC) is that the coin is not backed by a fiat currency or something similar.

Comparatively, UST is an “algorithmic” stablecoin, meaning code keeps the coin pegged to a dollar, as traders mint more UST, Terra’s other native token, Luna, is burned to create new UST, up until recently this worked to keep the price of UST stable to a dollar.

The system failed over the weekend as it could not keep up with the demand of traders seeking to mint new UST. The freefall fell into Monday as the price of the stablecoin dropped to a new all-time low, sending traders into a fearful state leading them to sell more of their coins.

Secretary Yellen today said: “A stablecoin known as TerraUSD experienced a run and declined in value. I think that this simply illustrates that this is a rapidly growing product and there are rapidly growing risks.”

“New products and technology may present opportunities to promote innovation and increase efficiencies,” she said. “However, digital assets may present risks to the financial system, and increased and coordinated regulatory attention is necessary.”

This isn't the first time the government is eyeing crypto with President Biden calling for a coordinated effort to regulate the crypto market back in March, but it does come at a downtrodden time for the industry as many tokens have seen their value slashed in half. With some people's portfolios looking similar, these individuals may feel burned and ask questions

The government may have no answers as of yet.