The US Senate organized a hearing about stablecoins and appropriate regulation for the sector. Some senators remain sceptical on the use cases of stablecoins and decentralized finance (DeFi) due to issues with asset backing and the unregulated nature of the sectors.
Stablecoins were the focus of a hearing of the Senate Banking, Housing, & Urban Affairs Committee. The hearing addressed three aspects of stablecoins: how they work, how they are used, and what risks they present. Alexis Goldstein, director of Financial Policy at the Open Markets Institute, and Hilary J. Allen, a law professor at American University Washington School of Law, were grilled by Senator Elizabeth Warren of Massachusetts.
Warren on stablecoins
Senator Warren succinctly outlined her view on stablecoins, explicitly highlighting the risks they pose as part of decentralized finance (DeFi) and the lack of audits and regulation for stablecoin issuers.
She explained that a stablecoin’s value is supposed to be pegged to a fiat currency, the price of a commodity like gold, or a group of assets. In the case of the USDC, the value of one coin should theoretically be exactly 1 dollar. According to her, the value unfortunately does fluctuate and does not always remain at exactly $1. Different exchanges may offer dollar values that are slightly less or more than that, which leads to unrealistic expectations for consumers.
Unbacked stablecoins in DeFi
Senator Warren also brought up the issue of stablecoin backing. The company responsible for issuing Tether recently got into hot water, as it failed to provide backing to 100% backing to its stablecoins. Tether claimed to have dollar reserves for 10% of stablecoins issued, while other assets such as commercial papers back 90% of the coins issued. Warren pointed out that no government currently verifies claims of some stablecoin issuers regarding the assets backing up their coins, highlighting the lack of audited financial statements or government regulations.
Warren then turned her attention to decentralized finance (DeFi) and what panic selling of stablecoins could do to the financial system.
“This is where the regulation is effectively absent and no surprise, it’s where the scammers and the cheats and the swindlers mix among part-time investors and first-time crypto traders. Don’t you think DeFi could threaten our financial stability and can DeFi can continue to grow without stablecoins?” – Senator Elizabeth Warren
Stablecoins are often used in DeFi staking schemes, where tokens are locked into a piece of computer code called a smart contract to earn more assets or participate in governance. They are also used to obtain annual yields if deposited into a DeFi platform, an example of which is Aave.