Janet Yellen highlighted Terra’s collapse amid the senate hearing and asked for stablecoin legislation since the run on UST shows how stablecoins are a rapidly growing product and there are growing risks as we can continue reading in today’s latest crypto news.

Treasury Secretary Janet Yellen highlighted Terra’s collapse and deep pegging of the stablecoins, saying that they should be regulated this year. In a hearing recently, she said that digital assets do promote innovation but they could also pose risks to the financial system. Yellen used the example of Terra which is a blockcahin that has a native stablecoin UST that slipped below its dollar peg yesterday.

Stablecoins are cryptocurrencies that are supposed to be stable and tied to a fiat currency like the US dollar or the EUR but can be related to gold as well and they are of extreme importance in the crypto ecosystem. They are what crypto traders use to enter and exit positions in other tokens on exchanges especially decentralzied exchanges like Uniswap and Curve. The Terra troubles happened because, unlike other stable coins, UST is not backed by a fiat currency in the bank or some other equivalent.

UST is an algorithmic stablecoin which means the code keeps it pegged to the dollar and when traders want to mint more UST they have to burn Terra’s other native token LUNA which means that some tokens are removed from circulation and create new coins. This has worked in the past to keep the price of UST stable to the dollar. However, now the system was not able to keep up with the desires of the traders and the UST troubles continued for a few days when the coin fell to an all-time low after traders sold off their tokens. The run along with the macroeconomic factors contributed to the larger crash in the market as the price of BTC and ETH dropped by 11% and 10% respectively.

Yellen added:

“A stablecoin known as TerraUSD experienced a run and declined in value. I think that this simply illustrates that this is a rapidly growing product and there are rapidly growing risks.”

The new products and the new technology could pose opportunities to promote innovation and increase efficiencies but digital assets could pose risks to the financial system and increased regulatory attention is needed, as Yellen noted. She added that it is urgent that Congress passes stablecoin legislation by the end of the year. The US government had its eye on stablecoins for a while now and the Biden administration was working to bring stablecoin issuers under the same regulatory regime as banks. Biden even issued an executive order calling for US Federal government to coordinate the efforts in regulating the crypto sector.