Top US Banking Regulator Says Tether (USDT) May Have Similar Vulnerability to TerraUSD (UST) Without Regulation

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The head of a key US banking regulatory agency says Tether (USDT), a stablecoin designed to be pegged to the US dollar, may not be a safe place for crypto investors to park their capital.

Earlier this month, Terra (LUNA), now named Terra Classic, fell to essentially zero as Terra’s UST stablecoin lost its peg to the dollar, wiping out roughly $60 billion in wealth.

At the same time, USDT also briefly lost its peg by a small amount amid heavy sell pressure before recovering.

In an interview with CNBC, the head of the Office of the Comptroller of the Currency (OCC), Michael Hsu, says the collapse of Terra (LUNA) and its algorithmic stablecoin UST exposed “deep vulnerabilities” in the crypto ecosystem.

“I think what’s really interesting, TerraUSD was an algorithmic stablecoin… Tether is not. It’s not an algo stablecoin. It’s backed by assets. And yet, we still had some contagion from one to the other. Why?

I think for those like me, bank regulators, or historians of money-like instruments, this is a really familiar story. And the way to deal with it is prudential regulation. This is why I think some of the options, the proposals for more of a bank [or] regulatory type of approach is a good starting point for that conversation.”

According to Hsu, the fact that Tether was also briefly affected in the same timeframe as UST’s collapse is something investors must not take lightly.

“Clearly, you saw contagion, not just from Terra to the broader crypto ecosystem, but to Tether, to other stablecoins, and I think that’s something that wasn’t assumed. And I think that’s something people have to really pay attention to.”

Senator Cory Booker (D-NJ) says that while regulation is needed to make the industry more transparent, the regulatory environment shouldn’t force innovative companies in the space out of the country.

“What we don’t want to do is choke a new industry and innovation out so that we lose out on opportunities. Or what I’m seeing right now, a lot of these opportunities just move offshore, and we’re missing the economic growth and job creation that’s a part of it. So this is a really important space if we get the regulation right, that can actually be helpful to the industry and protecting consumers.”

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