WASHINGTON — Despite the recent turmoil in crypto markets, Treasury Secretary Janet Yellen said that stablecoins don’t yet present a systemic financial risk, but cautioned that they’re a fast-growing asset class that could become more important to the financial system.
“I wouldn’t characterize it at this scale as a real threat to financial stability, but they’re growing very rapidly and they present the same kind of risks we have known for centuries in connection to bank runs,” she said.
She declined to give a “numerical cutoff” at which point stablecoins would become a systemic risk.
Yellen said that a Central Bank Digital Currency, which the Federal Reserve is currently reviewing, could help some of the riskier aspects of stablecoins, notably by creating a safer alternative to the wide range of stablecoins currently popping up.
“I think a benefit of issuing a central bank digital currency would be that it might diminish the proliferation of these stable coins, but it depends on the design of exactly how the central bank digital currency is introduced,” she said.
But there would be risks, she added, privacy and anti-money laundering concerns chief among them. Traditional commercial banks could also get cut out of the equation if the federal government is directly issuing the digital currency, Yellen acknowledged.
“It could draw a lot of funding away from the banking sector if it’s a very attractive asset,” she said.
Yellen also defended the Biden administration’s plan to tie the stablecoins issuers into the banking regulatory system, and once again called for Congress to pass legislation on cryptocurrency regulation amid the implosion of TerraUSD.
Rep. Pat McHenry, R-N.C., the panel’s ranking member, pressed Yellen on the Biden administration’s proposal to require that stablecoin issuers receive bank charters. That recommendation comes from a report issued by the President’s Working Group, which doesn’t explicitly address the current crypto markets meltdown because it bypasses the issue of “algorithmic’ stablecoins.
TerraUSD is an algorithmic stablecoin, meaning it uses a financial algorithm to determine its value, in this case pegging the value of terra to $1 worth of the cryptocurrency called luna. Other non-algorithmic stablecoins are backed by cash and assets to maintain their value.
In her comments, Yellen says that there’s a “significant” difference between algorithmic stablecoins and asset-backed stablecoins.
McHenry questioned the Biden administration’s plan to require that stablecoin issuers receive a kind of bank charter, which would bring these financial products under the purview of banking regulators and, the Biden administration says, allow them to mitigate risk.
McHenry asked if there was a way to require stablecoins be backed “one-to-one” by high-quality, liquid assets and not have it be domiciled within a bank.
“Dodd-Frank was about derisking the big banks, and now the President’s Working Group contemplates that we’re going to add more risks to these institutions,” he said.
Yellen said that the Biden administration group considered different options, but “unanimously” recommended that regulators establish a bank framework for stablecoins.
“It’s a flexible framework,” she said. “It involves appropriate capital and liquidity requirements, which I think are important and is a framework in which payment system risks can be addressed.”
Inflation also took up a large amount of bandwidth during the hearing, with Republican lawmakers trying to pin rising prices on government spending during the COVID-19 pandemic.
Yellen said that inflation is currently being caused by a variety of factors, including rising energy prices due to Russia’s invasion of Ukraine and pandemic-caused supply chain issues.