All Eyes on Lawmakers as US Set to Regulate Stablecoins

All Eyes on Lawmakers as US Set to Regulate Stablecoins
Image: Creative Commons (IMF)
11 May 2022

As virtual currencies become more intertwined with the financial system, the ongoing UST saga has caught the attention of regulators in the United States, who are citing a need to rein in stablecoins – payment tokens that are pegged to currencies such as the US dollar – and ward off potential risks to consumers and the financial system.

“There are many risks associated with cryptocurrencies,”  US Treasury Secretary Janet Yellen said on Tuesday in response to questions by the U.S. Senate Banking Committee on regulation of cryptocurrencies.

“We see run risks which could threaten financial stability, risks associated with the payments system which could threaten its integrity, and risks associated with increased concentration if stable coins are issued by firms that already have substantial market power,” Yellen said.

Read more: Is This the End for Bitcoin? Cryptocurrencies Face Reckoning

(Un)stable coins

A stablecoin is a digital currency pegged to a reserve asset like gold or fiat currency, and thus is regarded as more stable than cryptocurrency like Bitcoin. They’re typically used on cryptocurrency platforms, where they can be borrowed in exchange for cryptocurrency-based collateral or used as payment. 

Currently, the two largest stable coins, Tether (USDT) and USD Coin (USDC), have a market cap of US$83 billion and US$48 billion, respectively. But questions have been raised whether such stablecoins are actually backed fully by dollars and dollar-denominated assets.

The Treasury, and regulators including the Federal Reserve, the Securities and Exchange Commission and the FDIC, said that it will put out a report in the next few weeks on regulating such assets.

UST struggles

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

Over the weekend, somebody sold $285 million of UST, Terra’s algorithmic stablecoin, on Curve Finance, which led to the depeg of UST decreasing to US$0.985. Rumors of what happened on Curve spread rapidly on Twitter, leading to massive withdrawals on the Anchor protocol, and a fall in the price of Terra’s Luna token.

Rumors have been spreading on Twitter that bad actor(s) could have been involved in bringing UST down, but nothing has been confirmed.

Luna Foundation Guard, which is in charge of maintaining UST’s peg, drained its US$1.5 billion bitcoin reserve and bought US$850 million more Bitcoin to defend the peg. Do Kwon, founder of Terra, is said to be raising a further US$1 billion from investors for the cause.

Terra to USD chart (Image: Trading View)

Read more: TerraUSD Just Depegged and Everyone’s Panicking – Should You Be Concerned?

Yesterday, Do Kwon, said his team were “close to announcing a recovery plan for $UST,” but the algorithmic stable coin is struggling to claw back to its peg.

UST relies on the LUNA token to maintain its price through algorithmic minting and burning mechanics.  As of the time of writing, UST was trading at US$0.60, while Luna is trading at US$7.92, about 77% down in the past 24 hours.

Terra to USD chart (Image: Trading View)
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