Secretary Yellen: Stablecoins Pose Significant Risk to Financial Stability

key takeaways

Congress needs to pass stablecoin legislation before the end of the year, Yellen said
UST’s recent crash shows the market is vulnerable to runs, the Treasury Secretary warned

US Treasury Secretary Janet Yellen doubled down on her stance that stablecoins pose a threat to financial stability Tuesday during annual testimony before the Senate Banking Committee.

“I certainly think there are many risks associated with cryptocurrencies,” Yellen said in response to a question from Sen. Catherine Cortez Masto, D-Nev., about when stablecoin regulation might come.

“The cryptocurrency market is now larger than the subprime mortgage market, which triggered a global financial crisis,” Cortez Masto said.

The Treasury will issue a “comprehensive report” on cryptocurrencies and stablecoins “shortly,” Yellen said, as part of a request from the President’s Working Group on Financial Markets (PWG). She also stressed that Congress should be working on stablecoin legislation too, saying that it is “highly appropriate” this gets done by the end of 2022.

“[With stablecoins,] we see run risks, which could threaten financial stability, risks associated with a payment system and its integrity and risks associated with increased concentration if stablecoins are issued by firms that already have substantial market power,” Yellen said. “We definitely see significant risks.”

These risks are not hypothetical, they are playing out in real time, Yellen added.

“A stablecoin known as TerraUSD experienced a run and declined in value,” Yellen said, referring to UST losing its US dollar peg and falling as low at $0.65 Monday. “I think that this simply illustrates that this is a rapidly growing product and there are rapidly growing risks.”

The aggregate value of stablecoins grew over the past year to more than $180 billion in March 2022, the Federal Reserve noted in its financial stability report, released Monday. The stablecoin sector is highly concentrated, the report added, with the three largest stablecoin issues (Tether, USD Coin, and Binance USD) making up more than 80 percent of the total market value. Terra USD previously was the third largest by market capitalization until Monday’s meltdown.

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