Regulators anxious about stablecoins like tether after UST collapse

Regulators are getting increasingly worried about stablecoins after the collapse of controversial cryptocurrency venture Terra.

TerraUSD, an “algorithmic” stablecoin that’s meant to be pegged one-to-one with the U.S. dollar, has erased much of its value this week after a stunning run on the bank that saw billions of dollars suddenly evaporate from its market value.

Also known as UST, the cryptocurrency operated using a complex mechanism of code combined with a floating token called luna to balance supply and demand and stabilize prices, as well as a multibillion-dollar pile of bitcoin.

Tether, the world’s biggest stablecoin, also slipped below its intended $1 for several hours on Thursday, fueling fears of a possible contagion from the fallout of UST de-pegging. Unlike UST, tether is supposed to be backed by sufficient assets held in a reserve.

U.S. Treasury Secretary Janet Yellen directly addressed the issue of both UST and tether “breaking the buck” this week. In a congressional hearing, Yellen said such assets don’t currently pose a systemic risk to financial stability — but suggested they eventually could.

“I wouldn’t characterize it at this scale as a real threat to financial stability but they’re growing very rapidly,” she told lawmakers Thursday.

“They present the same kind of risks that we have known for centuries in connection with bank runs.”

Yellen urged Congress to approve federal regulation of stablecoins by the end of this year.

The U.K. government is also taking notice. A spokesperson for the government told CNBC Friday that it stands ready to take further action on stablecoins after Terra’s collapse.

“The government has been clear that certain stablecoins are not suitable for payment purposes as they share characteristics with unbacked cryptoassets,” the spokesperson said.

Britain is planning to bring stablecoins within the scope of electronic payments regulation, which could see issuers such as Tether and Circle become subject to supervision by the country’s markets watchdog.

Separate proposals in the European Union would also bring stablecoins under strict regulatory oversight.

They’re sort of like casino chips for the crypto world. Traders buy tokens like tether or USDC with real dollars. The tokens can then by used to trade bitcoin and other cryptocurrencies.

The idea is that, whenever someone wants to cash in, they can get the equivalent amount of dollars for however many stablecoins they want to sell. Stablecoin issuers are meant to hold a sufficient level of money corresponding to the number of tokens in circulation.

Today, the entire market for stablecoins is worth more than $160 billion, according to data from CoinGecko. Tether is the world’s biggest, with a market value of about $80 billion.

UST is a bit of a unique case in the stablecoin world. Unlike tether, it didn’t have any actual…