With the collapse of the UST still fresh in everyone’s mind, the UK and US have already responded by proposing to regulate stablecoins in order to avoid any systemic risk to financial stability.
Concerns about the soundness of stablecoins
The US Treasury and the UK Treasury were the first two authorities to respond to the collapse of UST, the algorithmic stablecoin in the Terra ecosystem. They have raised concerns about stablecoins.
While these virtual assets are supposed to be stable (hence the name), they are the ones that drove the cryptocurrency market down last week as investors questioned their stability. There was of course the collapse of the controversial UST which was the hardest hit stablecoin and lost almost all its value, but not only that.
Tether, which is still supposed to be worth $1 since it is backed by the dollar, fell to $0.95 last Thursday, causing panic among investors, but also among regulators, who were already taking a dim view of USDT. Fortunately, this did not last as Tether was trading back up to $1 a few hours later.
As a result of all this, at a hearing in the US Congress last Thursday, Janet Yellen, the US Treasury Secretary, directly addressed the issue of Terra Stablecoins (UST) and Tether (USDT). In particular, she said that at present these assets do not pose a systemic risk to US financial stability, but this may be the case in the near future.
Janet Yellen told lawmakers on Thursday:
I wouldn’t characterize it on this scale as a real threat to financial stability, but they are developing very quickly. They present the same kind of risks that we’ve seen for centuries in banking panics. “
We can see the willingness of the US to learn from its past mistakes regarding financial crises (especially the 2008 one) and not to underestimate the weight of cryptocurrencies in the economy and especially in global financial stability.
US and UK authorities want stablecoin regulation
Janet Yellen wants the US Congress to approve federal regulation of stablecoins by the end of this year to regulate them.
For its part, the United Kingdom had already announced at the beginning of April that it also wanted to regulate stablecoins in order to be able to use them as means of payment, and thus become the world leader in cryptocurrencies.
On Tuesday 10 May, Prince Charles announced in the Queen’s Speech that the UK government would introduce new legislation for the UK’s financial services sector, in which two bills mentioned cryptocurrency.
The country intends to bring stablecoins under the regulation of electronic payments, which could bring issuers of the asset such as Circle and Tether under the oversight of the country’s market regulator, the Financial Conduct Authority (FCA).
The collapse of UST is likely to speed things up as on Friday the government indicated it was ready to take further action on stablecoins after Terra’s collapse.
Algorithmic stablecoins in regulators’ sights
A UK government spokesman said on Friday:
“The government has made it clear that some stablecoins are not suitable for payment purposes because they share characteristics with un-backed cryptoassets. “
Through this statement, it is noticeable that the UK government is directly attacking algorithmic stablecoins, which are not based on traditional currencies such as the euro or the dollar, but on tokens, in this case Luna for UST. This type of stablecoin quickly becomes unstable when the cryptocurrency it is backed by undergoes large variations.
The UK wants algorithmic stablecoins to be excluded from regulation because of their lack of stability. Only stablecoins backed by fiat currencies will be considered. The Terra case seems to be part of the tightening of regulations around the world
