"I wouldn't characterise it at this scale as a real threat to financial stability, but they're growing very rapidly and they present the same kind of risks that we have known for centuries in connection with bank runs," Yellen told lawmakers.
Stablecoins, which are supposed to track real-world currencies, play a central role in the stability of the broader crypto market by providing traders with a safe place to park their cash between making bets on volatile digital coins.
Tether, the biggest operator in this US$180b stablecoin space, plays a crucial role in facilitating trading across the crypto market and also provides a link with the mainstream financial system.
Tether aims to maintain a peg to the dollar by keeping up a store of reserves of traditional assets. There are 80b Tether tokens in circulation, meaning it should hold US$80b in assets — a sum that compares with the biggest hedge funds in the world. But details around how those reserves are managed are scant, and not subject to audits under internationally recognised accounting standards.
Paolo Ardoino, Tether's chief technology officer, on Thursday vowed to defend the token's dollar peg and said the company had bought "a ton" of US government debt, which it is willing to offload in that effort.
But in an interview with the Financial Times, he declined to give details about its US$40b hoard of US government bonds because he did not "want to give our secret sauce".
"Our counterparties are not public. We are not a public company," he said. "So we keep that information [to] ourselves, but we are working with many big institutions in the traditional financial space."
What is a stablecoin?
Stablecoins are tokens pegged to other assets, usually the world's biggest and most stable currencies. They act as crypto-native dollars and a bridge between crypto and traditional financial worlds. They also allow traders to more easily convert traditional currencies into cryptocurrencies for trading.
The coins can be lent as collateral for trading, or to generate high yields in the form of interest. They are supposed to have a fixed price and be backed by reserves at all times, allowing users to redeem them. However, critics have questioned where some stablecoins keep their reserves and whether the assets can be quickly recovered and redeemed.
Last year, the US Commodity Futures Trading Commission fined Tether US$41 million, claiming the company made "untrue or misleading" statements about its reserves.
Ardoino also said the stablecoin issuer is working on obtaining an audit, but said the big accounting firms "are quite scared for reputational risk in touching crypto at this moment". Tether has had $2bn in redemption requests in the past day, an unusually high number, Ardoino added.
He said the group had recently been shifting away from holdings of commercial paper, a type of short-term corporate debt typically sold by highly rated companies, to Treasury bills. Treasury bills now account for around half of the group's US$80b in reserves, he added.
Chris Taylor, a partner at proprietary trading firm GSA, said he is "a little more concerned about [the Tether debacle's effect on] the ecosystem in general, but for now it seems to be stabilising". Maintaining the redemption process would be key to restoring confidence in the digital coin, he added.
Ardoino said it was consistently possible to redeem Tether for US$1 in cash by requesting a wire transfer that would be processed by its banking partners in the Bahamas.
