Treasury Secretary Janet Yellen Calls for Urgent Regulatory After Collapse of Terra’s UST Stablecoin

11. May 2022 Posted by Akolkar B on News

The Terra ecosystem is currently under big trouble with the value of TerraUSD (UST) stablecoin collapsing by 70% in the last three days. Earlier today, the UST price further plummeted reaching a low of $0.30. On the other hand, the price of the LUNA cryptocurrency has collapsed 95% in the last three days.

The recent episode has shook the crypto community and drawn the attention of U.S. Treasury Secretary Janet Yellen. On Tuesday, May 10, Yellen called the urgent need of having a strong regulatory framework for stablecoins.

During her testimony before the Senate Banking, Housing and Urban Affairs Committee, Janet Yellen said: “A stablecoin known as TerraUSD experienced a run and had declined in value. 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.”

Her response came to a question by Senator Pat Toomey. Yellen said that it would be “highly appropriate” for passing a legalization this year. The goal of the regulatory framework would be to minimize the volatility in the crypto sector.

She further added that the current framework is not “comprehensive” neither “consistent” to address the risks of using stablecoins as a new means of payment.

Earlier this week on Monday, May 9, the Federal Reserve published the Financial Stability Report wherein it mentioned the financial risks posed by stablecoins. It added that the growing use of stablecoins to margin requirements in leveraged crypto trades might heighten redemption risks.

Although stablecoins have been an important part of the crypto ecosystem, the recent episode with Terra’s UST have shaken the trust of investors. Over the last weekend, a single whale reportedly sold $285 million worth of UST stablecoins across Curve and Binance.

Terra’s UST stablecoin is completely decentralized and works on algorithmic functions. As the price of UST drops under $1, more LUNA is minted in the system. The recent price crash of UST has resulted in excess LUNA in the system as a result of which its price has collapsed more than 90% in just a few days.

Reportedly Terra Labs has spent all its $3.5 billion worth of Bitcoin reserves to buy more UST from the system. However, it seems to have played little in stopping the downfall.