Federal Reserve Chair: Stablecoin reserves must be 'publicly transparent'

Speaking at the Opportunities and Challenges of the Tokenisation of Finance  on Tuesday, central bank and financial regulatory titans joined up to discuss the role of central banks in an ever-growing crypto economy. 

During the almost five-hour long discussion, the group consisting of Federal Reserve Chair Jerome Powell, European Central Bank President Christine Lagarde, Managing Director of the Monetary Authority of Singapore, Ravi Menon and Bank of International Settlements General Manager Agustin Carstens touched upon topics ranging from DeFi, stablecoins and central bank digital currencies (CBDCs). 

Much of the discussion centred around crypto regulation, particularly in the aftermath of the implosion of algorithmic stablecoins like Deus Finance's DEI token and more importantly, Terraform Labs' terraUSD (UST) stablecoin. 

Terra was an algorithmic stablecoin that attempted to maintain its $1 parity by algorithmically changing the levels of supply between its finite UST token and infinitely supplied sister token Luna. Since UST was defined as $1 worth of Luna, the value of Luna exchanged for UST varied.

However, on 2 May, $150m of UST was withdrawn from the decentralized exchange platform Curve, dampening investor confidence. Due to the withdrawals of UST, the supply of Luna expanded, decreasing the value of Luna and subsequently the UST it was backing.

An issue with algorithmic stablecoins is that codes can only respond to what the programmer has foreseen and cannot account for the mass market selloffs or bank runs that occurred during the time. Terra and Luna lost $40bn as they imploded, wiping $600bn from the crypto space. 

The contagion sparked a mass stablecoin depegging, with partially fiat-collateralised Tether trading at $0.956 and fully fiat-collateralised Circle's USDC and Binance's BUSD trading above their $1 parity.

Chart 1: Terra collapses

Source: CoinMarketCap

Powell said: "The reserves need to be transparent, transparent to the public and they need to consist of credit assets that will always be there when they need to fund withdrawals. 

The Federal Reserve Chairman also shed light on the US's central bank digital currency (CBDC) plans, noting that the Federal Reserve was "carefully looking at the costs and benefits of issuing a CBDC" but that the decision to launch one would not occur for "some time."

Powell's comments come following the Biden administration unveiling of the "First-Ever Comprehensive Framework for Responsible Development of Digital Assets" on 16 September. 

The framework suggests the CBDCs have the "potential to offer significant benefits", including faster cross-border transactions and environmentally sustainable alternatives to hard cash. 

However, Powell noted that "cash is not disappearing here in the US [however] it is compared to non-cash payments". 

Currently, a bipartisan bill about stablecoin regulation is underway in Congress. However, it is not entirely clear if this bill is one proposed by Committee Chair Maxine Waters and Ranking Member Patrick McHenry or the Lummis-Gillibrand Bill.