Tech Regulation Digest: In Name Only? The Stablecoin Market and Pending Regulation

Overview

At a Senate Banking Committee hearing this month, Treasury Secretary Janet Yellen reiterated the need for regulatory oversight of stablecoins—a cryptocurrency whose value is explicitly linked to another asset¹. The Secretary’s comments come after TerraUSD—an algorithmic stablecoin—lost its peg to the US dollar and catalyzed a redemption event across the cryptocurrency market, wiping out at least $300 billion in value. Events this month should give momentum to US policymakers looking to regulate the stablecoin market. Since the beginning of the year, 20 relevant bills² have been introduced in Congress and President Biden signed an executive order that outlines his policy priorities in the area.

Background

The stablecoin market has grown exponentially in the last several years (see chart below). As the name suggests, the stability offered by these assets is what sets them apart. Unlike other cryptocurrencies that go through notable periods of price volatility, stablecoins are designed to maintain a fixed value. The most popular stablecoins are fixed 1:1 with the US dollar and are backed by dollar reserves³. However, TerraUSD and others like it are algorithmic stablecoins that maintain their peg to the US dollar with other digital assets. The events that took place earlier this month were akin to a bank run, with Terra holders losing faith in the value of the currency and redeeming en masse, causing Terra to lose its peg to the dollar.

Stablecoins and other cryptocurrencies currently exist in a regulatory environment sometimes described as the digital Wild West. Determining how to regulate this market is made difficult by the nascent technologies and the decentralized nature of the ecosystem. Regulators have become increasingly vocal of the risks posed to financial stability and – as demonstrated by TerraUSD—the financial wellbeing of investors.

Source: Milken Institute analysis of Statista & CoinMarketCap data (2022).

Why is This Important?

The collapse of Terra this month will likely bring the stablecoin market more scrutiny from regulators in the US and abroad. As reported by the Wall Street Journal, the losses sustained by poorly educated retail investors is a particularly relevant issue in this instance and could lead to even stricter disclosure requirements for stablecoin issuers in pending legislation.

What Happens Next?

As mentioned above, 20 bills⁴ relevant to the cryptocurrency ecosystem have been introduced in Congress since the beginning of 2022. One worth keeping an eye on is Senator Toomey’s bill that was introduced in April. The Stablecoin TRUST Act would require stablecoin issuers to secure a license and maintain a standardized disclosure policy intended to educate consumers and investors. Notably, the act would also exempt qualifying stablecoins from regulatory oversight from the Securities and Exchange Commission (SEC), a detail that has been debated in recent months.

For questions, please contact [email protected].

^{1. Cryptocurrencies are digital assets that are issued and/or transferred on a blockchain without an intermediary such as a bank.↩}

^{2. Of the 65 bills introduced in the 117th Congress regarding “digital currency” 20 of them were introduced in 2022. Congress.gov only filters by Congress, not year, so included are all 65 bills regarding “digital currency” for the 117th Congress.↩}

^{3. Dollar reserves typically includes a mixture of cash, commercial paper, & Treasury bills.↩}

^{4. Of the 65 bills introduced in the 117th Congress regarding “digital currency” 20 of them were introduced in 2022. Congress.gov only filters by Congress, not year, so included are all 65 bills regarding “digital currency” for the 117th Congress.↩}