(Bloomberg) — Lawmakers and regulators are renewing calls for new rules after a popular stablecoin lost its peg to the US dollar, putting investors and the market more broadly at risk.
TerraUSD, or UST, has plunged well below its $1 peg, leaving backers scrambling to shore up the token. They’re now trying to raise $1.5 billion to stabilize the coin, according to the founder of a firm that was approached about the deal. But so far they’re having a hard time winning over investors.
“If Congress does not act in this space, then the danger is, at some point, a fiat-backed stablecoin might lose its dollar peg. And that could not only be very problematic for consumers who lose money, but it could have repercussions,” Senator Pat Toomey, the top Republican on the Senate Banking Committee, told reporters Wednesday.
The debacle validates a concern that regulators have raised about stablecoins and whether investors can truly rely on issuer promises that the tokens can be redeemed at par for US dollars. The President’s Working Group on Financial Markets has warned that if users lose confidence in that promise that could lead to runs, which may have knock-on effects for the broader financial system.
Treasury Secretary Janet Yellen said Tuesday at a Senate hearing the Terra coin meltdown underscores the urgent need for guardrails and said it would be “highly appropriate” for lawmakers to enact legislation sometime this year.
Senate Banking Committee Chairman Sherrod Brown said the drop in the coin’s value raises questions about crypto more generally.
“What does that tell you? We should be skeptical of this whole industry,” he said, adding that regulators are particularly important given the difficulty of passing new legislation.
Toomey, who released a draft proposal to set new rules for stablecoins last month, said he believes that fiat-backed crypto has the potential to automate payments, but that regulations are necessary to protect investors. He also said it’s important to distinguish between coins that are backed by cash or other assets, and those that are supposed to be stabilized by an algorithm. Terra’s UST is an algorithmic stablecoin.
“I think what people need to see is that not all cryptocurrencies are alike, not all stablecoins are alike,” Senator Cynthia Lummis, a Wyoming Republican, said in a hallway interview at the Capitol. “And at this point, it’s a very buyer-beware situation.”
Toomey said he is hopeful that there could be bipartisan legislation sometime this year addressing stablecoins. However, it’s unclear how quickly a bill could come together ahead of the mid-term elections in November.
“What we want is for consumers that know what they’re doing, what risks they’re taking, and then markets will figure out what are good investments and what are bad investments,” Toomey said. “And honestly, it’ll probably take some failures in this space in order for the market to discover what works.”
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