Make Kitco Your Homepage

Yellen addresses stablecoin turmoil: not a 'real threat to financial stability,' but it's growing 'rapidly' and presents 'bank run' risks known for centuries

Kitco News

(Kitco News) As the stablecoin collapse sent the crypto market crashing, with Bitcoin trading below $30,000 and Ethereum below $2,000, U.S. Treasury Secretary Janet Yellen addressed the significance of the meltdown.

"I wouldn't characterize it at this scale as a real threat to financial stability, but [the use of stablecoins is] growing very rapidly, and they present the same kind of risks that we have known for centuries in connection with bank runs," she testified before the House Financial Services Committee Thursday. "They are assets that purport to guarantee conversion at will to the dollar on a one-for-one basis."

Yellen was referencing the TerraUSD (UST) crash, the algorithmic stablecoin that lost its peg to the dollar over the weekend and continued to collapse throughout the week. At the time of writing, UST was at $0.37, down 40% on the day.

The popular stablecoin Tether falling to trade below $1 for the first time ever early on Thursday exacerbated the situation. Since then, however, Tether was able to recover following reassurances from Tether's chief technology officer Paolo Ardoino.

During her testimony, Yellen also called for more regulation, adding that it would help the stablecoin community.

"The financial stability oversight council is analyzing right now potential financial stability risks from digital assets at large. I can't say that they have reached the scale right now where they are a financial stability concern," she said. "What I do see is that the use of digital assets is rising very rapidly. They present the same kinds of risks of run risks and other risks, payment system risks. And we need a comprehensive framework so that there are no gaps in the regulation."


Gold price is manipulated by the Fed, suspects mining tycoon Frank Giustra, but suppression can't last forever

One of the complaints Yellen cited coming from her discussions with the industry was regulatory uncertainty. "If Congress were to establish a framework, it would make it easier for the issuers of these assets to know what the regulatory environment would be," she said.

The regulatory framework Yellen is proposing to regulate stablecoins is a bank-type framework.

"It's a flexible framework. It involves appropriate capital and liquidity requirements, which I think are important and is a framework in which payment system risks can be addressed," she clarified. "Creating a framework that is appropriate to the risks that stablecoins present really provides the kind of certainty about the regulatory environment that issuers of stablecoins need to thrive and to innovate."

On top of that, Yellen added that a central bank digital currency (CBDC) could solve many of the risks and problems associated with stablecoins. However, she did cite privacy concerns as one of the main obstacles.

"That is the reason to want to have the central bank digital currency. But there were also concerns it could have a very significant impact on the structure of financial intermediation, depending on how it's designed," she said.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.