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: Algorithmic stablecoins may be ‘inherently unstable,’ Sen. Toomey says after Terra episode

Sen. Pat Toomey of Pennsylvania said Wednesday the recent sharp declines in the value of the TerraUSD
USTUSD,
+3.94%

stablecoin underscore the need for Congress to quickly pass a regulatory framework for stablecoins.

Toomey, the ranking Republican on the Senate Banking Committee, also argued that the episode may call into question whether algorithmic stablecoins are a flawed concept more broadly. Stablecoins are a type of cryptocurrency that aim to maintain a stable value relative to government-issued currencies like the U.S. dollar.

See also: Yellen says run on UST stablecoin illustrates crypto’s risk to financial stability

Some stablecoins are backed up by real assets and maintain confidence by promising that users can redeem one token for one dollar, drawn from those asset reserves. Algorithmic stablecoins use computer code that expands and contracts their supply in order to maintain a stable value.

The episode “illustrates what many folks have observed, which is the danger than a certain mechanism designed for maintaining the value of a [stablecoin] might be inherently unstable,” Toomey said.

“I think it’s important to distinguish between algorithmic stablecoins that use this or some other kind of mechanism, versus the stablecoins that are backed by cash or cash equivalents,” he added. “I think it’s the latter category of stablecoins that is much more likely to be adopted as a medium of exchange.”

The Biden administration issued a report in November recommending Congress pass a law requiring that stablecoins be issued by insured banks that are overseen by federal regulators. Toomey put forward his own proposal that would create a new federal license for stablecoin issuers but would not require those issuers to be banks.

Major cryptocurrencies, including bitcoin
BTCUSD,
+1.01%

and ether
ETHUSD,
+1.29%
,
were seeing declines Wednesday.

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