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Congressional Research Agency Hints at Stablecoin Regulations Following TerraUSD (UST) Collapse

A nonpartisan Congressional research agency is hinting that stablecoin regulations are becoming more likely following the recent disintegration of TerraUSD (UST).

In a new report by the Congressional Research Service, the stablecoin industry lacks the regulations found in traditional finance systems that safeguard investors.

“Many observers consider the stablecoin industry as not adequately regulated. While in the traditional financial system, a run-like scenario could be somewhat mitigated by regulatory safeguards and backstops, the stablecoin industry has not incorporated such measures.

For example, in the traditional financial system, bank deposit insurance and liquidity facilities could reduce market participants’ incentives to have a run.”

UST, an algorithmic stablecoin issued by Terra (LUNA), collapsed earlier this month after it depegged from the US dollar.

The Congressional Research Service hints that the downfall of UST could lead to regulations for the nascent industry as some promising frameworks have already been proposed, including ones that would restrict which assets could back stablecoins and establish which entities are allowed to issue them.

“With respect to reserve disclosure and composition, there have been a few recent legislative proposals. In March 2022, Representative Hollingsworth introduced H.R. 7328, which would establish auditor-verified reporting requirements for stablecoin issuers and restrict the assets that could back a stablecoin. Senator Hagerty introduced a Senate version of the bill, S. 3970, in May 2022.

There have also been some discussion drafts in the House and Senate. These discussion bills provide a possible framework for stablecoin issuers. For example, while these drafts differ in their approach, they would establish institutions eligible to issue stablecoins, create disclosure requirements for the assets backing stablecoin, provide standards for the composition of those reserves, and consider avenues for financial backstops for stablecoins.”

   

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