Treasury Secretary Janet Yellen wasted no time saying how the recent Terra’USD breaking its dollar peg exposed the threat to financial stability and the urgent need for a regulatory framework to offset the risks, in a Senate Banking Committee hearing on 10 May.
“A stablecoin known as TerraUSD experienced a run and declined in value,” Yellen said. “I think that simply illustrates that this is a rapidly growing product and that there are risks to financial stability and we need a framework that’s appropriate.”
Stablecoins risk a “run” on the funds backing them if investors lose confidence in the token’s ability to maintain its stable value.
Last year, President Joe Biden’s Working Group on Financial Markets published a report asking Congress to make stablecoins issuance by federally regulated banks mandatory. This is to ensure investor confidence and avoid the sort of asset-run scenario like the one recently experienced.
Even Chairman Gary Gensler of The SEC has not ruled out regulating stablecoins like securities.
Terra’s co-founder announced a recovery plan
According to reports, the reason the TerraUSD debacle has been exacerbated is due to the LUNA foundation that manages TerraUSD and LUNA announcing recently that it would lend out bitcoin from its reserves to traders who would buy the stable coin and bolsters its price.
Unfortunately, prices have not recovered, and top exchanges had to temporarily halt UST and LUNA withdrawals due to network load and sheer transaction volumes, only to resume later.
Analysts blamed this move has instead made matters worse and led to the further decline in the price of bitcoin.
In a tweet thread addressed to the community, Kwon admitted that the last 72 hours have been extremely difficult and that he hopes that they will come out of the crisis.
“Before anything else, the only path forward will be to absorb the stablecoin supply that wants to exit before UST can start to repeg. There is no way around it,” he said on Twitter.
To start with, Kwon is endorsing a community proposal that will increase LUNA’s minting capacity per day. “This should allow the system to absorb the UST more quickly”, the tweet read.