The Congressional Research Service (CRS), a legislative agency that supports the United States Congress, published a document containing an overview on algorithmic stablecoins and pointing out the key factors to consider in the recent TerraUSD (UST) crash.
In the report, the CRS described the UST token crash as a “bank run-like” scenario and raised that there are policy issues related to the risk of such events. According to the CRS, a “bank run” situation begins when users doubt the reserves that support the parity of the asset to the dollar.
After this, a significant number of investors withdraw their investments at the same time, causing a negative domino effect that threatens the financial stability of the cryptocurrency ecosystem and the traditional financial system.
The research agency further explained that bank run scenarios in traditional finance are protected by regulation. and other measures such as bank deposit insurance and liquidity facilities. These reduce the incentives of those who consider withdrawing their assets.
Besides, the CRS notes that the stablecoin sector is not as “properly regulated” and that there may be gaps in stablecoin regulatory frameworks, as the agency previously analyzed in another report. Additionally, the CRS highlighted existing policy proposals that may restrict the assets that could back stablecoins and establish reporting requirements.
For its part, US Treasury Secretary Janet Yellen recently noted that the decoupling of stablecoins like UST and Tether (USDT) is not a threat to the country’s financial stability. Despite this, Secretary Yellen also noted that the digital industry is “growing very rapidly” and presents similar risks to banks.
Following the crash of Terra (LUNA) and UST, Terra co-founder Do Kwon announced that the Terraform Labs team will create a new proposal to fork the Terra blockchain. The new blockchain will not be related to UST, while the old Terra network will continue to coexist with UST and will be renamed Terra Classic (LUNC).
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