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Yellen Says Terra Meltdown Shows Crypto-Stablecoin Dangers (1)

May 12, 2022, 3:38 PM

Treasury Secretary Janet Yellen gave the US government’s most forceful response yet to the meltdown of TerraUSD, saying that the crypto stablecoin’s woes underscore the risks associated with the asset class.

Yellen said on Thursday that Terra’s spectacular tumble shows the dangers of tokens that purport to be pegged to the US dollar. She called for new regulations and added that Treasury was working on a report about the issue.

WATCH: Secretary Yellen talks about the risks crypto and digital assets pose to the economy.
Source: Bloomberg

“I wouldn’t characterize it at this scale as a real threat to financial stability, but they’re growing very rapidly and they present the same kind of risks that we have known for centuries in connection with bank runs,” she told lawmakers on the House Financial Services Committee.

Concerns around the assets have also proliferated in the past week on Capitol Hill after TerraUSD, or UST, lost its peg to the dollar over the weekend. UST is a so-called algorithmic stablecoin, meaning that it’s not backed by assets like cash or cash-equivalents. Instead, it relies on trading and treasury management to maintain its value. In the most recent twist, one exchange-traded product tied to Terra saw its price almost evaporate in what may be the biggest ETP wipeout ever.

Read more: Terra ETP Plunges 99% as Crypto Chaos Triggers Historic Declines

Washington’s concerns aren’t new. In November, the Treasury and a group of federal agencies appealed to Congress to act to address “key gaps” in regulatory authority over stablecoins. They urged legislators to require that stablecoin issuers become insured depository institutions, subjecting them to oversight from banking regulators.

In March, President Joe Biden signed an executive order directing federal agencies across the government to devote more attention to prospective regulation of digital assets and placed the “highest urgency” on research, development and design of a potential U.S. central bank digital currency. He directed the Treasury to report on the implications of a CBDC within 180 days.

On Thursday, Yellen provided a glimpse into an approach the government could take in deploying a CBDC. She suggested that traditional financial institutions, rather than the government, could deal directly with users of such a coin.

“There are a variety of design choices there, and there are issues around that,” she said. “Privacy is an issue if the central bank were to issue it directly to consumers.”

(Updates with comments on central bank digital currency in final two paragraphs.)

--With assistance from Christopher Anstey.

To contact the reporter on this story:
Christopher Condon in Washington at ccondon4@bloomberg.net

To contact the editor responsible for this story:
Ben Bain at bbain2@bloomberg.net

© 2022 Bloomberg L.P. All rights reserved. Used with permission.