One of the biggest moments at the Senate Banking Committee’s stablecoin hearing Tuesday (Dec. 14) was a declaration by Sen. Elizabeth Warren (D-Mass.) that decentralized finance, or DeFi, is “the most dangerous part of the crypto world.”
DeFi, Sen. Warren said, “is where the regulation is effectively absent and — no surprise — it’s where the scammers and the cheats and the swindlers mix among part-time investors and first-time crypto traders.”
Calling stablecoins “the lifeblood of the DeFi ecosystem,” Sen. Warren noted that they are used to trade DeFi cryptocurrencies and related derivatives, and in DeFi lending and borrowing platforms.
That is true.
But that’s true of all crypto trading, especially among large and institutional traders who are making frequent trades on short-term price changes, exchange arbitrage, and other strategies. While you can swap one crypto directly for another — say buy bitcoin with ether — that’s largely an option for the biggest cryptocurrencies on many exchanges.
According to an October study, half of all bitcoin trades are executed using the largest stablecoin, tether, with a market capitalization of $76 billion. On Dec. 14, the 24-hour bitcoin trade volume was $32.7 billion.
Read more: Half of All Bitcoin Trades Are Executed Using Tether
Speaking to Hilary Allen, a witness and professor at American University Washington College of Law, Sen. Warren asked, “does DeFi threaten our financial stability and can DeFi continue to grow without stablecoins?”
Allen said she did not “think DeFi can grow without stablecoins,” saying, “Right now, I think DeFi is contained to the point where it won’t impact financial stability.”
But, she added, if DeFi is allowed to grow, “I think there’s a real threat there, particularly if it becomes intertwined with our traditional financial system — and there is industry interest in pursuing this integration on both the traditional finance and the crypto side.”
Therefore, she said, “I think it’s critical that stablecoins not be allowed to feed that growth.”
See also: Ex-Treasury Official: Crypto Fits Under Existing Financial Regulations. Deal With It
Not everyone agrees.
In a recent interview with PYMNTS’ Karen Webster, Amias Gerety, a partner at QED Investors and an acting assistant secretary for financial institutions in the Obama Administration’s Treasury Department, said he was “disappointed” by a recent report by the President’s Working Group on Financial Markets for saying there is no regulation of stablecoins instead of “firmly asserting that there are laws in place to govern these activities.”
Arguing that existing financial regulations apply to stablecoin issuers just as much as they do banks, Gerety said, “I think that there’s been a willful desire not to accept laws that are already on the books.”
He added, “I think the clearer regulators can be, these are the laws, and they apply, the better off we’ll be.”
The Tether problem
Sen. Warren also took aim at Tether, the company that issues the tether (USDT), the stablecoin, pointing out — as many non-foes of crypto have — that its financial statement has not gone through an independent audit.
Related: What Senate Banking Committee Chair Sherrod Brown Should Be Asking Tether
The same can’t be said of Circle-issued USD Coin. As Dante Disparte, Circle’s chief strategy officer and head of global policy, noted in his opening remarks, Circle is regulated and its audited assets are all in dollars or highly liquid, short-duration U.S. Treasuries.
Of course, USDC has a market cap if $41.7 billion, but is used far less in trading than tether. USDC’s 24-hour trade volume was only $6.4 billion.
Sen. Warren got one thing wrong when talking about Tether when she said that it only held 10% of its assets in cash. Actually, it was 2.9%.
Which does give some credence to Prof. Allen’s argument that in a crisis, a run on tether could lead to the company’s inability to immediately redeem its stablecoin for dollars.
However, if that happened right now it would not threaten the U.S. financial system, Allen said.
“I think the impact would probably be felt in the DeFi ecosystem,” she added. “And that’s why it’s critical that we not provide this government support to the DeFi ecosystem.”
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