DeFi and Stablecoins Both in the Crosshairs! Senator Writes to U.S. Treasury Secretary Yellen: Crypto Risks Pervade Financial System, Urgent Need for Regulatory Cleanup

U.S. Senator Elizabeth Warren has long been skeptical of cryptocurrencies and has repeatedly urged for regulations to be put in place. On July 26, she once again wrote to U.S. Treasury Secretary Janet Yellen, stating that the high risks associated with cryptocurrencies have permeated every corner of the financial system.

In addition to her role as a senator, Elizabeth Warren is also the chair of the Financial Stability Oversight Council. In an open letter addressed to Yellen, she estimated that there are over 2,000 cryptocurrencies globally, with a combined market value that may exceed $2 trillion.

She continues to stress the urgency of legislation to counter the growing risks that cryptocurrencies pose to the financial system and provides examples to support her case.

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1. Hedge Funds and Pension Funds Increasing Holdings

She cited a Forbes report stating that investments in the crypto space by hedge funds, pension funds, and family offices continue to grow, with the investment share in 2020 increasing by 22% compared to the previous year.

According to statistics, North American fund institutions are expected to have a 10.6% share of cryptocurrency investments by 2026. The lack of standardized data reporting is seen as a reason for the increased participation of hedge funds and institutional investors, which is also a blind spot for regulators.

2. Increased Banking Risks

She referenced a 2019 report from the Bank for International Settlements (BIS) which highlighted that the high volatility of crypto assets and related services could pose liquidity, credit, and market risks for banks, especially when crypto companies do not have to comply with the same regulatory standards as banks.

3. "Special Risks" of Stablecoins

According to the Federal Reserve's 2019 Financial Stability Report, Elizabeth described stablecoins as "special" cryptocurrencies pegged to the value of one or more assets and warned that due to the global liquidity of stablecoins, a poorly designed and unregulated stablecoin could pose financial stability risks, especially in the event of a significant run leading to severe consequences for domestic and international economic activities and asset prices.

4. Rising Cyber Attacks

Citing the Financial Research Office of Financial Research (OFR) report, she mentioned that the popularity of cryptocurrencies has increased incentives for conducting malicious cyber attacks and ransomware attacks. The lower regulatory scrutiny and traceability of cryptocurrencies compared to other ransom payment methods make them more attractive to hackers.

5. Risks of Decentralized Finance (DeFi)

Elizabeth pointed out that DeFi, which is rapidly growing and highly opaque, involves mostly anonymous developers and allows users to engage in various financial activities such as lending, trading derivatives, without traditional banking intermediaries. Referring to a 2019 Financial Stability Board report, she highlighted that DeFi could lead to new forms of centralization risks and unequal distribution issues.

In conclusion, Elizabeth emphasized that the risks associated with cryptocurrencies are widespread throughout various corners of the financial system and not limited to a single regulatory authority, posing uncontrollable risks with a chain reaction effect.

This is not the first time Elizabeth Warren has criticized cryptocurrencies. Earlier, she expressed similar arguments in an interview with Bloomberg, stating that cryptocurrencies urgently need more regulatory mechanisms. Interestingly, Twitter's founder, Jack Dorsey, immediately unfollowed Elizabeth on Twitter after her remarks.