Terra stablecoin collapse was ‘entirely predictable,’ Circle CEO says

Circle CEO Jeremy Allaire joins Yahoo Finance Live to discuss the collapse of stablecoins like Terra, the cryptocurrency sell-off, crypto regulation, and the outlook for crypto exchanges.

Video transcript

BRAD SMITH: Welcome back to Yahoo Finance Live, everyone. The state of stablecoins seeing a little bit of a wobble this week. And joining us now to really discuss and help break down exactly where we go from here in that conversation and in that value as well, we've got Circle CEO Jeremy Allaire. And of course, Circle a unicorn company within this broader crypto landscape and stablecoin landscape. What do you make of what you've watched play out this week and where there can continue to be some footing going forward from here?

JEREMY ALLAIRE: Yeah, well, thanks for having me on. Really, a lot to talk about, obviously. I think what has unfolded with these unstable stablecoins, such as UST, was entirely predictable. Our own analysis from a very long time ago suggested that the footing that this was on was really based on subsidizing these yields, which was really driving people to kind of buy this Luna token, create these UST tokens, put them in this 20% interest rate, which was too good to be true.

And as the founder kind of moved from point to point to try and resuscitate it, it was clear that this was very risky. And in any kind of meaningful market contraction, just the way that this was structured, it could face a death spiral. And so that's exactly what we saw. We saw a massive death spiral. And I think the really unfortunate thing here is that so many individuals in the digital asset space, so many leaders, frankly, and very intelligent people bought the hype, promoted the hype.

And I think that's hurt people. I think it's hurt retail investors. I think it's hurt the ecosystem as a whole. And so there's been some damage done. And I think people need to have some self-reflection about that. But we're also seeing, though, is there is a flight to quality. And I think people are now, whether it be policymakers or market participants, are really scrutinizing what are these stablecoins and what makes them stable.

And so USDC has really stood out. It stood the test of time. It's one of the only regulated dollar digital currencies that is required by law to hold a full reserve of highly liquid dollar assets to ensure that this is always a dollar on the internet. And so I think you're seeing that happen. And I think you're seeing a lot more attention on this from both market participants and policymakers who, I think have been acknowledging that these risks exist. And now, when you have a major blowup like this, it's certainly going to accelerate, I think, the need for Congress to act and establish some perimeters around who and what is involved in operating $1 stablecoin in the United States of America.

JULIE HYMAN: And Jeremy, I want to get more into that into potential regulation. But first, I do want to ask you about where else we could see these situations, because when I look at the broader crypto landscape beyond stablecoins, it seems like there's a lot of rampant speculation in stuff that maybe people shouldn't be buying, that it's too good to be true in various ways. Are we going to see a lot more of this, especially as prices continue to go down?

JEREMY ALLAIRE: Well, I think it raises a really important set of questions around kind of fair disclosures and for market participants and, you know, whether it be exchanges like FTX or Coinbase or others like Binance, having a framework that they're providing to both assess, as well as vet, as well as ensure that the individuals that are trading on their platforms have a good understanding of the risks.

So, you know, I think there's been some really interesting recommendations from Sam Bankman-Fried from FTX that I think are well supported by others like Coinbase in this space, which are sort of looking at ways to have token disclosures and other things that are corollaries to what we've seen in other financial markets as well. So I think there are some really important steps that need to be taken.

I think the really critical thing is a stablecoin that is designed to be $1, that is designed to function as $1. It needs to function as $1. And I think that's why, when the White House and the Treasury Department looked at this market as a whole, the highest priority, and in fact, what the White House and Treasury Department said last year is, it's an urgent priority that Congress act to establish a framework for national licensing and supervision of dollar stablecoins, because it's such a building block for the crypto economy. It's such a building block of everything that's going to be possible in terms of what people are going to build on top of this. And so it's really foundational.

JULIE HYMAN: Yeah, well, there's urgent, and then there's urgent, I guess, because they haven't moved on this yet, but to your point, the Treasury Secretary Janet Yellen talked to the House Committee on Financial Services yesterday, and she brought this issue up again. And I want to play what she said.

JANET YELLEN: There are potentially useful innovations that could make the payment system faster and more efficient. But we really need a regulatory framework to guard against the risks. And just this week, in the last couple of days, we've had a real live demonstration of the risks, a stablecoin, so-called algorithmic stablecoin, known as Terra broke the book.

JULIE HYMAN: Well, there you have it. Yellen's talking about it, to your exact point, Jeremy. But is Congress going to act? Are they getting the message, do you think?

JEREMY ALLAIRE: I think they are. I mean, we've been very encouraged by the work that leaders in the House and the Senate in the Financial Services and Banking Committees, on both sides of the aisle, leadership, members, others, there are very real, very viable legislative proposals that are on the table. And I think you're going to see because of what's happening now, because of the urgency, as you say, the urgent, urgent, I think you're going to see some action here.

And it's something that we've advocated for, for some time. I think standing between broad-based mainstream adoption of crypto infrastructure for commerce and financial applications at a global scale is this regulatory clarity. And I think we have the impetus to see that happen now.

BRAD SMITH: We've heard the Fed increasingly talk about the possibility of a central bank digital currency acting as its own kind of digital currency and stablecoin, if you will. But is this the opportunity that people like yourself, other industry leaders that are not operating algorithmic and scrutinized stablecoins, that you see to essentially bring another type of offering to the market? And what would the reality of that legal framework look like, as we know that the US House Financial Services Committee, they held the hearing on stablecoins? Have you been able to review any of what they've been putting forward in document writing right now?

JEREMY ALLAIRE: Yeah, I mean, a couple of key things. I mean, the first is that there's sort of aspirational, and there's operational. And dollar digital currencies like USDC have been operational for four years, are growing incredibly fast. And I think leaders like Chairman Powell, like Secretary Yellen, have acknowledged multiple times in public hearings that dollar stablecoins are going to play a key role here, that they're actually the key thing that's happening now. It's a now thing, not a future thing. And it's important to get some frameworks around it.

And so I think the market is developing much, much faster than the government or government R&D project that might take three or five years. And what's going to happen over the next two to three years is that these things could become internet scale. They're getting-- they're approaching that reality. And so, really, the urgency and the focus needs to be on what do you do to enable that. The guardrails are there for the private market to really innovate and grow, but manage these tail risks, as they surely do exist.

In terms of the question about what are we seeing, absolutely, there are great proposals that have been put forward by Democrats and Republicans, some on a bipartisan basis in the House. You're seeing Senator Toomey, ranking member in the Senate Banking Committee, putting forward what we think is overall a very strong potential framework for national stablecoin issuer licensing. And I think you're seeing some comments from Chairman Sherrod Brown that he sees this as an important issue to act on now as well.

So we're seeing good drafts. We're seeing good thinking on it. We're seeing that very constructive from Democrats and Republicans. And that's a good sign in a Congress that has historically been relatively divided. This is something that America can be unified about, because this is about American national economic competitiveness.