Crypto Analytics

Terra Crisis Fuels Regulatory Concerns Over $180 Billion Stablecoin Market

A crisis engulfing one of the world’s largest stablecoins has deepened, igniting regulators’ concerns over the assets underpinning the global cryptocurrency market.

TerraUSD, which is attempting to consistently track the dollar at $1, slumped to a low of 30 cents on Wednesday, which is one of the most high-profile examples of a stablecoin breaching its so-called peg to date. Stabilization attempts by the Luna Foundation Guard – acting like a central bank for the token – have failed.

The episode has given fresh fuel to financial regulators’ concerns about the rising risks the $180 billion stablecoin industry poses to traditional markets as crypto becomes more integrated with traditional payment and banking systems.

“A stablecoin known as TerraUSD experienced a run and lost value,” US Treasury Secretary Janet Yellen said on Tuesday. “I think that just goes to show that this is a fast growing product and there are fast growing risks.”

Stablecoins aim to provide crypto investors with a safe haven so they can store digital cash and easily switch between different cryptocurrencies. Generally they claim to be backed by a basket of dollar assets.

Terra, which was among the top five stablecoins on the market earlier this week, is different. It is what is known as an algorithmic stablecoin that attempts to track the dollar by increasing or decreasing its amount.

Regardless of the structure behind stablecoins, regulators have been concerned about their role for some time. The Federal Reserve, the European Central Bank, and the Bank of England have all warned about the risks posed by stablecoins and specifically their ties to the traditional financial system.

In its regular Financial Stability Report this week, the Fed noted that just three — Tether, USD Coin, and Binance USD — make up about 80 percent of the overall market.

It warned that even stablecoins backed by reserves “can lose value or become illiquid in times of stress,” adding that “these vulnerabilities are compounded by a lack of transparency around the risk and liquidity of assets, that support stablecoins can be tightened.”

Ilan Solot, partner at crypto group Tagus Capital, said: “The gut reaction is to throw it [TerraUSD] Debacle as bad news from a regulatory perspective – and that might turn out to be the case.” However, he said it could also highlight the differences between algorithmic coins and those backed by a basket of reserves.

The TerraUSD situation, which emerged during a week of intense volatility in the crypto markets, adds to general concerns about the largely unregulated stablecoin industry. Tether, the market leader, provides limited details on the specific holdings of traditional financial assets that underpin its peg to the US dollar. In October 2021, the US Commodity Futures Trading Commission fined Tether $41 million after the company allegedly made “untrue or misleading statements and omissions of material facts” regarding its reserves.

In a research note on Wednesday, UBS said that the TerraUSD episode “is also likely to increase regulators’ focus on USDC and Tether, which while not yet systemically important to the broader financial payments, clearing and settlement, are linchpins of the crypto commercial sector are”. .

In a series of Twitter messages on Wednesday, Terra co-founder Do Kwon told members of the “Terra community” that “I understand that the last 72 hours have been extremely tough for all of you – you know, I’m committed to working with you.” to work together with each of you to get through this crisis and we will work our way out of it. Together.”

Source: Crypto News Austria

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