The Congressional Research Service (CRS), a regulatory arm of the Congress of the United States, has released a document that provides an overview of algorithmic stablecoins and highlights critical elements to consider in the TerraUSD (UST) collapse.
The CRS labeled the TerraUSD (UST) collapse as a “run-like” situation in the report and said that policy problems are linked to the danger of similar incidents. Per the CRS, a “run” occurs when holders have doubts about the reserves backing the asset’s US dollar parity.
After this, a large number of investors withdraw their funds simultaneously, causing a negative ripple effect that undermines the cryptocurrency ecosystem’s and traditional finance system’s financial stability.
In conventional finance, run-like events are protected by legislation and other mechanisms such as bank deposit protection and liquidity facilities, according to the research service. These factors weaken the motivation of persons thinking about selling their holdings.
The CRS, however, observes that the stablecoin sector is not appropriately regulated and that there may be loopholes in existing regulations for stablecoins, as it did in previous research. Furthermore, the CRS drew attention to existing policy measures that would limit the holdings that might be used to support stablecoins and reporting requirements enforcement.
Nevertheless, US Treasury Secretary Janet Yellen recently stated that the depreciation of stablecoins such as TerraUSD (UST) and Tether (USDT) poses no risk to the financial stability of the United States. Notwithstanding the earlier claim, Secretary Yellen stated that the digital sector is developing extremely quickly and poses similar threats to banks and financial institutions.