The precipitous fall of Terra has re-energized crypto skeptics. On May 10, amid Terra’s collapse, Treasury Secretary Janet Yellen argued before the Senate Banking Committee that stablecoins create “run risks, which could threaten financial stability, risks associated with the payment system and its integrity.” Clearly, not every token that calls itself a “stablecoin” is stable, but Ms. Yellen is wrong to think that stablecoins pose a systemic risk to financial stability.
A true stablecoin is a dollar-like token collateralized by at least $1 worth of assets. The best known stablecoins, Tether’s USDT and Circle’s USDC, account for $72.5 billion and $54 billion, respectively, in circulating supply. Opportunistic regulators and politicians, notably the Securities and Exchange Commission’s Gary Gensler and Sen. Elizabeth Warren, call stablecoins “wildcat banks” and argue that they are susceptible to runs.
