The sudden meltdown of an investment firm or money market fund often spurs U.S. government officials to action, with regulators gathering on urgent calls to decide whether and how to intervene. As one of crypto world’s major stablecoins – TerraUSD (UST) – slid toward disaster this week, it hasn’t triggered any such meetings.
Despite the recent federal stance that stablecoins could pose a rising threat to the U.S. financial system, the Financial Stability Oversight Council (FSOC) hasn’t gathered to weigh the potential hazards from UST, according to two people with knowledge of the situation. Though the panel of agency chiefs hasn’t met as a group, the Treasury Department and top financial regulators are monitoring the plummet of the dollar-pegged algorithmic stablecoin – which at one point Wednesday sold for a quarter.
The situation even warranted a mention from U.S. Treasury Secretary Janet Yellen in a Tuesday hearing in the Senate. Yellen, who leads the FSOC, said the token was experiencing a run that “illustrates that this is a rapidly growing product, and that there are risks to financial stability.”
A Treasury spokesman declined to comment on any internal discussions regarding UST.
Dollar-pegged stablecoins – the core assets whose steady values are meant to allow investors to reliably trade in and out of more volatile cryptocurrencies – typically hew to the price of a dollar, much like money market funds’ promise to give back at least a dollar for each one invested (though they additionally provide a small return over time, unlike stablecoins).
When the Reserve Primary Fund infamously “broke the buck” in the 2008 financial meltdown, the implosion of a major money market fund was a doomsday event that panicked the financial world. In the end, its slide took it down to $0.97 a share, though the failed fund eventually returned about $0.99 to its investors after a government intervention.
There are two significant reasons UST’s plight isn’t forcing a government response: the relatively small scale of the industry and the fact that oversight is so undefined. Federal officials have routinely said that the stablecoin market – now at $173 billion, according to coinmarketcap.com – is still paltry compared with the others overseen by such agencies as the Securities and Exchange Commission and Commodity Futures Trading Commission. And the industry’s regulatory oversight remains an open question, leaving federal officials uncertain about their reach.
Even if the agencies wanted to step in as UST users are losing billions, it’s uncertain which one would have authority to protect investors. And unlike regulated investments, which enjoy government backstops such as insurance from the Securities Investor Protection Corporation (SIPC), there’s no such protection for those who put their dollars into UST, which topped at $18 billion.
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