The Congressional Research Service (CRS), a legislative agency supporting the United States Congress, has released a document providing an overview of algorithmic stablecoins and pointing to key factors to consider in the TerraUSD (UST) crash.
In the report, the CRS described the UST crash as a “run-like” scenario, noting that there are political issues surrounding the risk of such events. According to the CRS, a “run” situation begins when holders have doubts about the reserves supporting the asset’s dollar peg.
As a result, a significant number of investors withdraw investments at the same time, leading to a negative domino effect that threatens the financial stability of the crypto ecosystem and the traditional financial system.
The research agency further explained that run-like scenarios in traditional finance are protected by regulation and other measures such as bank deposit insurance and liquidity facilities. These reduce the incentives for those considering withdrawing their wealth.
On the other hand, the CRS notes that the stablecoin industry is not as “adequately regulated” and that there may be gaps in the regulatory framework for stablecoins, as the agency previously discussed in another report. Additionally, the CRS highlighted existing policy proposals that could limit assets that could support stablecoins and set reporting requirements.
Meanwhile, US Treasury Secretary Janet Yellen recently noted that the unpegging of stablecoins like UST and Tether (USDT) poses no threat to the country’s financial stability. Nonetheless, Secretary of State Yellen also pointed out that the digital industry is “growing very quickly” and poses similar risks for banks.
After 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 Luna blockchain. The new blockchain will not be connected to UST, while the old Terra network will continue to coexist with UST and will be renamed Terra Classic (LUNC).