Yellen says crypto poses no systemic risk to the financial system

In short

  • Treasury Secretary Yellen has acknowledged that a $2 trillion crypto market cap is not a systemic risk.
  • Yellen also touched on the recent merger of stablecoin Terra UST.

Treasury Secretary Janet Yellen told members of Congress on Thursday that she doesn’t believe the crypto market has grown to such a size that it poses “systemic risk” — a designation that can trigger a series of shocks. new regulatory measures.

Yellen’s comments came during an appearance before the House Financial Services Committee where members pressed her on macroeconomic issues, but also repeatedly raised the topic of stablecoins– cryptographic tokens intended to maintain a connection to a fiduciary currency –and the current crypto market crash.

I can not tell [stablecoins] have reached a scale where they are financial stability issues,” Yellen said.

His observation came in response to a question from Rep. Jim Himes (D-CT) who noted that as a veteran of the 2008 financial crisis, he did not believe a $2 trillion crypto market was significant enough to trigger systemic risk designation. Himes added that the $2 trillion figure is now much lower in light of the recent crypto market crash.

While Yellen agreed with Himes’ proposition that a market capitalization of $2 trillion was not enough to trigger a systemic risk designation, she declined to say at what level – for example $5 trillion. or $6 trillion – designation would apply.

Following the 2008 crisis, Congress introduced legislation that recognized certain large financial entities – including banks and insurer AIG – as posing “systemic risk” to the US economy, and imposed a series omissions, including higher capital reserves, on their business operations.

Yellen also noted that while crypto and stablecoins are not currently reaching the systemic threshold, this may change in the future.

“I wouldn’t say they’re a real threat to financial stability, but they’re growing very fast and they present the same kind of risks that we’ve known for centuries with bank runs,” he said. she stated.

The audience also discussed the recent merger of the token known as Terra USD (UST), a stablecoin that until this week was the third largest in the crypto market.

Yellen noted that the UST, which is supposedly pegged to $1 but is currently trading around 48 cents, “broke the ball” and Tether, the largest stablecoin, briefly did the same on Thursday morning. Tether has fallen as low as 95 cents, but is currently back at $1.

The Treasury Secretary, in response to a question from Rep. Himes, also said she was aware of the distinction between algorithmic stablecoins like UST (which rely on financial incentives to preserve their dollar peg) and other stablecoins that are backed by a reserve. of dollars.

Representative Stephen Lynch (D-MA) also raised the issue of stablecoins, noting that there are over 200 of them, and suggested that issuing a central bank stablecoin would serve to eliminate most between them.

Yellen noted that financial regulators are exploring the viability of a central bank digital currency, but noted that such a currency could pose a privacy risk if it allowed the government to monitor people’s spending.

The questions about stablecoins at Thursday’s hearing reflect a strong push from Congress and the White House to impose new regulations on the crypto industry. In March, President Biden issued an executive order calling for better inter-agency coordination on crypto, and several bills in Congress aim to provide clearer rules for the industry.

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Don F. Davis