U.S. Treasury Secretary Raises Concerns Over ‘Systemic Risk’ of Stablecoins in New Speech

U.S. Treasury Secretary Janet Yellen has reservations about the rise of stablecoins and their implications on the financial landscape.

In prepared remarks, Yellen says that stabelcoins raise policy concerns in relation to “illicit finance, user protection and systemic risk.”

The former Chair of the Federal Reserve also says that stablecoins lack the sound and consistent regulatory oversight to make sure they are properly backed and redeemable.

She references the case of Iron Finance, a collateralized stablecoin ecosystem that lost its USD-peg in June of last year when the project’s Iron Titanium Token (TITAN) disintegrated from $63 to zero within hours.

“To peg their stablecoin to a dollar, most issuers say they back their coins with traditional assets that are safe and liquid. This way, whenever you want to trade your stablecoin back into a dollar, the company has the money to make the exchange. But, right now, no one can assure you that will happen. In times of stress, this uncertainty could lead to a run.

This is not hypothetical. A stablecoin run occurred in June 2021, when a sharp drop in the price of the assets used to back a stablecoin set off a negative feedback loop of stablecoin redemptions and further price declines.”

Yellen says her concerns regarding the digital asset economy go much further beyond just stablecoins and calls for regulatory oversight across the crypto ecosystem.

“Of course, stablecoins are just one piece of a much larger ecosystem of digital assets. Our regulatory frameworks should be designed to support responsible innovation while managing risks – especially those that could disrupt the financial system and economy.

As banks and other traditional financial firms become more involved in digital asset markets, regulatory frameworks will need to appropriately reflect the risks of these new activities. And, new types of intermediaries, such as digital asset exchanges and other digital native intermediaries, should be subject to appropriate forms of oversight.”

Earlier this week, Senator Pat Toomey of Pennsylvania proposed an alternative regulatory framework for stablecoins than what President Joe Biden had already offered.

Toomey’s bill would create a new license program for current stablecoin issuers that would maintain their status as legal money transmitting businesses while also allowing Federal Depository Insurance Corporation (FDIC) insured entities such as centralized banks and trust companies to issue stablecoins.

The bill would also mandate that issuers of stablecoins ensure rigid standards for privacy, redemption policies, and investor transparency.

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