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The Congressional Research Service (CRS) believes the TerraUSD (UST) collapse has shed light on gaps in the regulation of Stablecoin legislation.
CRS analysts have published a paper listing provisions in cryptocurrency regulation legislation that allowed “panicked flight of investors from the stabelcoin market.” The paper’s authors explained the fundamentals of algorithmic stablcoin and pointed out factors that need attention in the wake of the TerraUSD (UST) default.
According to CRS analysts, the withdrawal of investors from the UST market shows that once holders of the asset begin to doubt the reserves supporting the steiblocoin’s dollar peg, a massive withdrawal of capital occurs. Investors’ ill-considered actions lead to a domino effect that threatens the financial stability of the entire crypto market and the traditional financial system, analysts insist.
The paper’s authors point out that traditional financial systems are protected from such scenarios by regulation, bank deposit insurance and a liquidity mechanism. According to CRS, this reduces the incentives for investors exploring the possibility of withdrawing their assets from a falling market.
Analysts state that the stabelcoin industry is not as “adequately regulated” and that there are gaps in the regulatory framework. The CRS stresses that existing proposals to limit crypto-assets and reporting requirements could support stability in the stablocoin market.
Shortly after the UST debacle, U.S. Treasury Secretary Janet Yellen said the cryptocurrency market had not yet grown to the extent that it posed a threat to the financial system But called for accelerated regulation of stablcoins.
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