Stablecoins are creating a storm, and the U.S. Treasury Secretary asks Congress to pass new stablecoin legislation before the end of the year

During a livestreamed hearing on May 10, U.S. Treasury Secretary Janet Yellen called for stablecoin legislation to be passed by the end of the year and highlighted the risks surrounding TerraUSD (UST), saying: “A stablecoin called TerraUSD (UST) experienced a crash and lost value. I think this just illustrates that this is a rapidly growing product and there are risks that are growing rapidly… There are risks to financial stability and we need a framework in place.”

In response to a question about stablecoins from Republican Senator Pat Toomey (R-PA), Yellen said it was “very important, even urgent” for Congress to pass stablecoin legislation, further saying it would be “very appropriate” for Congress to do so before the end of the year.

Today, Bitcoin once fell below the $30,000 mark, triggering a series of altcoin declines, among which the Luna token price fell sharply, causing the stablecoin UST to decouple. According to Bitpush terminal data, as of now, the market value of UST is less than $16 billion. Previously, the market value of UST once reached $20 billion, becoming the third largest stablecoin in the cryptocurrency world and successfully ranking among the top ten cryptocurrencies.

As of now, according to data from coinmarketcap, four stablecoins have appeared in the top ten cryptocurrencies by market capitalization, namely: Tether (USDT), USDC , BUSD , and UST. The total market capitalization of stablecoins has reached more than 180 billion US dollars. The following figure shows the change curve of the market capitalization of the top ten stablecoins from January 2017 to April 2022:

From the above figure, we can see that the market value of stablecoins has doubled in 2021, and stablecoins have become one of the most common and practical value media in the current crypto market. In the early days of the crypto market, the underlying asset in the eyes of investors was Bitcoin, and other cryptocurrencies needed to be exchanged with Bitcoin. However, the huge volatility of Bitcoin in the early days led to a greater risk exposure for crypto investors. With the emergence of Ethereum and the development of its ecosystem, stablecoins emerged to meet the needs of more investors for risk control and exit. It can be said that the emergence of stablecoins has further promoted the rapid development and rise of the crypto market.

Problems with Stablecoins

The issue of stablecoins being insufficiently stable has been mentioned many times by regulators, who are concerned that the mushrooming of stablecoins, most of which are pegged to the U.S. dollar, could sow the seeds of instability in the overall financial market, an effect that could be more direct than the turbulence of blue-chip cryptocurrencies.

What makes regulators uneasy is what assets the stablecoin uses as a reserve to fulfill its promised 1:1 peg to the U.S. dollar. It is not just U.S. dollars in cash, as many people might assume, but a combination of commercial paper, bills, bonds and loans.

Credit rating agency Fitch once pointed out, “We believe that the authorities are unlikely to intervene to save stablecoins in the event of a disruptive event, partly due to moral hazard. If the redemption of stablecoins leads to or amplifies a broader commercial paper (CP) sell-off, puts pressure on market liquidity and hinders the issuance of new CP, the authorities may intervene to support dealers and major money market funds.”

The problem that stablecoins can cause is not only the decoupling from the value of the US dollar, but also the possibility of a series of selling pressures on the assets behind them after the decoupling, thus causing more serious market shocks. In short, the stablecoin with a market value of $180 billion is backed by assets worth $180 billion. And these $180 billion assets are the key to causing bigger problems.

Embrace and ban

On July 19, 2021, U.S. Treasury Secretary Janet Yellen met with the heads of several federal agencies to discuss the regulation of stablecoins. Participants discussed the rapid growth of stablecoins, their potential use as a means of payment, and ultimately the potential risks to users, the financial system, and national security. According to the minutes of the meeting, Yellen stressed that it is necessary to act quickly to ensure that stablecoins have an appropriate regulatory framework in the United States.

The Group of Twenty (G20) Finance Ministers and Central Bank Governors Meeting has also discussed the development and regulation of stablecoins on many occasions. At the G20 Finance Ministers and Central Bank Governors Meeting held in early July 2021, all parties agreed to implement the G20 roadmap for improving the cross-border payment system, look forward to discussing issues related to central bank digital currencies, and emphasize that global stablecoins must comply with relevant legal and regulatory requirements.

Of course, there is still no mature solution for the regulation of stablecoins. However, the contribution of stablecoins in cross-border remittances, B2B/B2C, digital economy, etc. cannot be underestimated. Stablecoins solve the problem of complex and cumbersome cross-border remittance processes and greatly simplify the transfer/payment process. In the future development and transformation of the digital economy, stablecoins may gain a lot of enterprise-level adoption.