Stablecoin Terra Crash renews regulators’ call for crypto legislation

Stablecoin terraUSD (UST) crashed on May 10 and is down 54% to $0.44 on the morning of May 11, prompting regulators to renew calls for cryptocurrency legislation.

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Stablecoins are cryptocurrencies whose purpose is to remain stable and have low volatility. They can be pegged to a currency or a commodity, such as gold.

Terra, a so-called algorithmic stablecoin, is pegged to the US dollar and can be used alongside LUNA, Terra’s unstable cryptocurrency, or as a standalone token, according to CoinMarketCap. It is also the 18and largest cryptocurrency by market capitalization.

“Stablecoins only have value to users if they hold their price fixed. The Terra Protocol uses fundamental market forces of supply and demand to maintain the price of Terra. When the demand for Terra is high and the supply is limited, the price of Terra increases. When the demand for Terra is low and the supply is too large, the price of Terra decreases. The protocol ensures that the supply and demand for Terra are always balanced, leading to a stable price,” according to Terra’s website.

The Wall Street Journal explained that terraUSD is structured differently than other major stablecoins, as it relies on financial engineering rather than hard assets – such as cash – to maintain its peg to the dollar. In turn, critics say that makes it riskier because traders might not always react as expected to its built-in incentives, according to the Wall Street Journal.

In a Financial Stability Report released on May 9, the Federal Reserve said the overall value of stablecoins has grown rapidly over the past year to reach over $180 billion as of March 2022. stablecoins remained highly concentrated, with the three largest stablecoin issuers – Tether, USD Coin, and Binance USD – constituting over 80% of the total market value,” according to the report.

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Treasury Secretary Janet Yellen, speaking at a Senate Banking Committee hearing on May 10, touched on stablecoins and the UST crash.

“[With stablecoins,] we see risks that could threaten financial stability – risks associated with a payment system and its integrity and risks associated with increased concentration if stablecoins are issued by companies that already have substantial market power,” said said Yellen, according to Coindesk. “We certainly see significant risks here.”

She added that the risks materialize in real time, saying that the UST had experienced a run and lost value. “I think it just illustrates that this is a rapidly growing product and there are risks to financial stability, and we need an appropriate framework.”

Anto Paroian, chief operating officer of cryptocurrency and digital asset hedge fund ARK36, told GOBankingRates that UST’s loss of its peg would be seen as one of the defining moments in the current market cycle. cryptocurrency.

“Unfortunately, the fallout from this situation goes beyond the material losses suffered by Luna’s investors,” he said. “Unpecking will likely result in substantial regulatory risk – if not for the entire crypto space, then certainly for the stablecoin market. Secretary Janet Yellen has previously highlighted Luna’s situation at a Senate Banking Committee meeting, calling for full regulation of stablecoins by the end of the year. Of course, long-term regulation is positive for the crypto space, but if stablecoin issuers are regulated as strictly as banks, it could stifle one of the most innovative, thriving and important sectors of the crypto market. cryptography.

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Paroian added that the crash will also reignite discussions about whether a truly decentralized algorithmic stablecoin is possible or, in fact, desirable.

“So far, the UST situation has shown us that the potential benefits may not outweigh the risks for the entire crypto space. DeFi users should also take note – a 18-19% return on a DeFi savings protocol operating a decentralized stablecoin does not come without a substantial degree of risk,” he said.

In a May 11 Twitter thread, Terra founder Do Kwon announced his intention to “re-anchor” the UST and acknowledged that the last 72 hours “have been extremely difficult for all of you.”

“The only way forward will be to absorb the stablecoin supply that wants out before $UST can start to repegger. There is no getting around this,” he tweeted.

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This article originally appeared on Stablecoin Terra Crash Renews Regulators Call for Crypto Legislation

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