Today, the entire stablecoin market is worth more than $ 160 billion.
Justin Thalys | AFP via Getty Images
Regulators are increasingly worried about Stablecoin after the collapse of the controversial cryptocurrency venture Terra.
TerraUSD“Algorithm” stablecoin USDErased much of its value this week after a bank run that saw billions of dollars suddenly evaporate from its market value.
Cryptocurrencies, also known as UST, worked in combination with a complex mechanism of code and floating tokens called Luna, balancing supply and demand and stabilizing prices. Bitcoin..
TetherThe world’s largest stablecoin also fell below the intended $ 1 for several hours on Thursday, fueling concerns about possible infections due to the fallout of UST depegging. Unlike UST, tethers are assumed to be backed by sufficient assets held in reserve.
US Treasury Secretary Janet Yellen has addressed both UST and Tether issues directly this week. Yellen said in a parliamentary hearing that such assets do not currently pose a systemic risk to fiscal stability, but suggested that they would eventually be possible.
“I wouldn’t see it as a real threat to fiscal stability at this scale, but they are growing very rapidly,” she told lawmakers Thursday.
“It presents the same kind of risk we have known for centuries in relation to the run on the bank.”
Yellen urged Congress to approve federal regulation of Stablecoin by the end of this year.
The British government is also paying attention. A government spokesperson told CNBC on Friday that he was ready to take further action against Stablecoin after the collapse of Terra.
“The government has made it clear that certain stablecoins are not suitable for payment purposes because they share characteristics with unsubstantiated crypto assets,” said a spokesman.
Britain Bring stablecoins within the scope of electronic payment regulationsPublishers such as tethers and circles may be subject to supervision by national market surveillance agencies.
Individual proposals in the European Union will also put Stablecoin down Strict regulatory supervision..
What is Stablecoin?
They are like casino chips in the world of cryptocurrencies. Traders buy tokens such as tethers and USDCs in real dollars. Tokens can be used to trade Bitcoin and other cryptocurrencies.
The idea is that whenever someone wants to get cash, they can get the equivalent of the number of stablecoins they want to sell. Stablecoin issuers aim to hold a sufficient level of money for the number of tokens in circulation.
Today, the entire stablecoin market is worth more than $ 160 billion, according to CoinGecko data. Tether is the largest in the world and has a market value of approximately $ 80 billion.
What happened to UST?
UST is a slightly unique case in the world of stablecoin. Unlike tethers, there was no real cash to return the pegs to dollars. Partially backed by Bitcoin..
Instead, UST relied on the system of algorithms. It looks like this:
- If there are too many tokens in circulation but not enough demand, the price of UST can be below $ 1.
- Smart contracts (lines of code written in the blockchain) are started to remove excess UST from supply and create a new unit of tokens called LunaThere is a variable price
- There was also an arbitrage system that encouraged traders to profit from the price deviations of the two tokens.
- The idea was that one UST could always buy $ 1 worth of Luna. So, if UST is worth 98 cents, you can basically buy one and trade it for Luna to get a profit of 2 cents.
Luna, UST’s sister token Basically worthless Earlier after exceeding $ 100 coins earlier this year.
The entire system was designed to stabilize UST for $ 1. But it collapsed under the pressure of billions of dollars in liquidation — especially Anchor, a lending platform that promised users 20% higher interest rates on their savings. Many experts say this was unsustainable.
Why are regulatory agencies worried?
The main concern is that major stablecoin issuers like Tether can experience “bank runs”.
Yellen and other US officials have often compared them to money market funds. In 2008, the original money market fund, the Reserve Primary Fund, lost $ 1 in net asset value per share. The fund held some of its assets in a commercial paper (short-term corporate debt) from Lehman Brothers. Investors fled when Lehman went bankrupt.
Earlier, Tether stated that its reserves consisted entirely of dollars. However, after reconciling with the Attorney General of New York in 2019, this position was reversed. According to the company’s disclosure, there is little cash, but there are a lot of unconfirmed commercial papers.
Tether says it is currently lowering the level of commercial paper it owns and increasing its US Treasury invoice holdings.
“We expect recent developments to increase the demand for stablecoin regulation,” rating agency Fitch said in a Thursday memo.
According to Fitch, the risks of stablecoins like Tether can be “more manageable” than the risks of algorithms like UST, but ultimately result in the creditworthiness of the company that issues them. To do.
“Many regulated financial institutions have increased their exposure to cryptocurrencies, defys and other forms of digital finance in recent months, and as crypto market volatility becomes more severe, one of the issuers of the Fitch rating. The department can be affected, “the company said.
“There is also the risk of impacting the real economy, such as the negative impact of asset effects, such as a sharp drop in the value of crypto assets. Nevertheless, the risk to the issuer of the Fitch rating and the real economic activity is generally very low. thinking about.”
