KEY POINTS

  • Sen. Elizabeth Warren calls DeFi "dangerous"
  • Sen. Sherrod Brown warns investors in stablecoins
  • Lawmakers discuss risks associated with Tether

Decentralized finance and stablecoins came in for some stinging criticism at a hostile U.S. Senate hearing Tuesday, with a Democratic senator warning that investors in stablecoins could end up losing all their money.

Witnesses urged lawmakers to establish a clear regulatory framework for stablecoins during the hearing of the Senate Committee on Banking, Housing and Urban Affairs.

Sen. Sherrod Brown, D-Ohio, warned that stablecoin holders could end up losing all of their money. "The only people to walk away unscathed are the big guys ... If you put your money in stablecoin, there’s no guarantee you’re going to get it back," he said.

Brown said the companies compare stablecoins to currencies like having dollars in the bank, but at the same time, they hide "terms and conditions in the fine print, allowing them to trap customers’ money." He also said stablecoins were neither decentralized nor transparent.

Brown's statements come against the backdrop of issues with Tether, a stablecoin that its issuer claims are fully backed by U.S. dollars, and the recent instance when Gyen, another stablecoin, got untethered from the Japanese yen.

Sen. Elizabeth Warren, D-Mass., asked about the role of stablecoins in decentralized finance, pointing out that it is time for the regulators to get serious about risks associated with these coins.

“DeFi is the most dangerous part of the crypto world,” said Warren. “This 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. In DeFi, someone can’t even tell if they’re dealing with a terrorist," she said.

Warren had earlier claimed that cryptocurrencies are mainly tied to illegal activities.

Jai Massari, a partner at Davis Polk & Wardwell, suggested that U.S. lawmakers could consider having stablecoin issuers operate under a federal charter instead of requiring them to be insured depository institutions, like banks. Massari said having a stablecoin issuer regulated similarly to an FDIC-insured bank is “unworkable” and “unnecessary.”

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