Stablecoins and cryptos does not pose risk to the financial system

• According to Janet Yellen, the market has not reached the point of becoming a financial stability concern.
• The hearing also brought up the current crypto meltdown that involves the crash of TerraUSD (UST), breaking its $1 stability to fall to nearly zero.

Last year, Jon Cunliffe, deputy governor of financial stability at the Bank of England, stated that the growing crypto industry poses a systematic risk to the traditional financial system. This, therefore, called for a comprehensive regulation to control the market with stablecoins inclusive. In her appearance before the House of Committee of Financial Services, Treasury Secretary Janet Yellen took a different position in response to questions relating to macroeconomic issues. 

According to her, the market has not reached the point of becoming a financial stability concern. This was agreed by Rep. Jim Himes (D-CT) who claimed a $2 trillion market is not enough to force a systematic risk designation. Even though she did not point out the exact level the market needs to reach to raise alarm on the financial system concerns, she believes that this could change in the future.

I wouldn’t characterize it as a real threat to financial stability, but they’re growing very rapidly and present the same kind of risks we’ve known for centuries from bank runs.

The US Congress came out with legislation after the 2008 crisis to flag down some large financial entities for posing a financial risk to the country’s economy. Institutions that are recognized can be subjected to a series of oversight which includes the imposition of higher capital reserves on their operation.

Discussions around stablecoins

The hearing also brought up the current crypto meltdown that involves the crash of Terra USD (UST), breaking its $1 stability to fall as low as $0.16. Replying to a question asked by Rep. Himes, Yellen explained that she clearly knows the distinction between Stablecoins like UST which uses financial incentives to stabilize its peg to the dollar, and those backed by a reserve of dollars. 

There has also been a discussion around the issuance of the Central Bank Digital Currency. According to Rep. Stephen Lynch (D-MA), the implementation of this will get rid of most of the stablecoins in the market. However, Yellen believes that there could be a huge gap in its implementation as it could pose a privacy risk if the government uses it to monitor people’s spending.

With the issues regarding stablecoins,  Commissioner Hester Peirce, also known as the US Securities and Exchange Commission “Crypto Mum” has said that authorities should come up with regulations that allow room for failure.

It’s been one area within crypto that’s really had quite a moment and there’s a lot of stablecoin use and therefore people are thinking down the road if this gets even bigger do we want to have some kind of regulatory framework? We need to allow room for there to be a failure because that obviously is part of trying new things and our framework really does allow for that kind of trial and error. I hope that we will use it for that purpose.

She further stated that regulators must consider all the conversations in crypto as the variation in stablecoins makes it very difficult to come up with a regulatory framework.