The cryptocurrency industry is scrambling to respond to U.S. lawmakers’ concerns about stablecoins following the collapse of TerraUSD, which wiped billions off the cryptocurrency market.
The Blockchain Association and the Chamber of Digital Commerce, which represent some of the most influential crypto companies, say they have been fielding a flurry of questions from Capitol Hill since TerraUSD, known as “UST,” broke its peg last week and crashed 90%.
Stablecoins are cryptocurrencies that try to maintain a constant exchange rate with fiat currencies. The $163 billion space is dominated by tokens that are pegged to the U.S. dollar, like Tether and USD Coin, by holding reserves in traditional dollar assets. Some stablecoins, like UST, however, use a complex algorithmic process to create the peg.
Capitol Hill lawmakers have been quizzing lobbyists on the structure of UST, seeking to determine whether its collapse was preventable and if other stablecoins could suffer the same fate. Lobbyists are urging lawmakers not to crack down too hard on the gamut of stablecoins.
“The one thing we’ve been cautioning to the Hill is that we don’t want to accidentally throw the baby out with the bathwater, because stablecoins we think are a really critical piece of the crypto ecosystem going forward,” said Kristin Smith, executive director of the Blockchain Association.
As the cryptocurrency market has exploded, reaching $3 trillion in November, the scrutiny of policymakers has increased. In response, the crypto industry has beefed up its presence in Washington, spending $9 million on lobbying in 2021, according to Public Citizen. The Blockchain Association and Chamber of Digital Commerce spent $900,000 and $426,663, respectively, while crypto giants Coinbase Global Inc and Ripple Labs forked out $1.5 million and $1.1 million respectively.
The industry’s growing influence will be tested as it tries to contain the fallout from the UST and broader crypto market crash, which shrank from $1.98 trillion to $1.3 trillion in just six weeks due to investor fears over rising interest rates.
There are currently a handful of draft stablecoin bills floating around Congress. While analysts say the chances of Congress passing any of those this year is slim with lawmakers focused on the midterm elections, recent crypto market gyrations have caused many lawmakers to take notice.
“There are a lot of people in Congress that are interested in coming up with a regulatory framework to prevent something like this from happening again,” said Smith.
President Joe Biden’s administration has largely focused on rules for dollar-backed stablecoins. A November Treasury Department-led report recommended Congress regulate stablecoin issuers like insured depository institutions, but it did not cover algorithmic stablecoins.
Lobbyists have had to quickly change tack and educate lawmakers on the differences, they say.
“All of the recent legislative proposals have been fiat-backed,” said Cody Carbone, policy director at the Chamber of Digital Commerce. “We thought we did pretty well in educating because we stayed within that scope, and now we’re going to have to broaden that.”
While the group’s members do not currently operate algorithmic stablecoins, the chamber is crafting talking points to explain how they work, said Carbone. Regulators have warned that U.S.-dollar stablecoins could be susceptible to runs if users lose confidence, a fear that appeared to partially play out last week: after UST broke its peg, Tether, the largest stablecoin, briefly broke its peg too.
“This is essentially a call to action, because not all monies are created equal, and what one believes to be stable may actually not be stable,” said Jonathan Dharmapalan, CEO of eCurrency, a digital currency technology provider. While the Blockchain Association’s Smith agreed legislation was not imminent, the UST problem “certainly heightens that need,” she said.