Crypto Analytics

Terra Uproar Adds Fodder to Minister Yellen’s Concerns Over Stablecoins

  • UST shows how risky stablecoins can be, Yellen said
  • The Treasury Department will “soon release a comprehensive report” on cryptocurrencies and stablecoins, Yellen said

The ongoing collapse of TerraUSD on Wednesday has put “rapidly growing risks” into focus US Treasury Secretary Janet Yellen commented on stablecoins during her annual hearing on Tuesday.

As Yellen appeared before lawmakers to discuss the state of financial stability, UST was rebounding from Monday night’s plunge, only to experience a larger downturn later in the day. Things got uglier overnight, with UST falling as low as 26 cents.

The stablecoin, about which Yellen and other lawmakers have repeatedly raised concerns for the past few months, has traded off the US dollar several times this week.

“TerraUSD went on a run and lost value,” Yellen said.

“I think that just goes to show that this is a fast growing product and there are fast growing risks.”

UST de-pegging first began on Saturday, with large sales of UST via Curve Finance’s UST 3pool, an exchange liquidity pool on Ethereum, and the centralized Binance exchange. That caused a liquidity imbalance, which in turn led to further outflows, said Dusan Kovacic, chief investment officer at the Rockaway Blockchain Fund.

A number of factors exacerbated liquidity problems for the protocol, Kovacic said. Given the design of the Terra ecosystem, 1 UST cannot be exchanged for $1 worth of LUNA if there is insufficient liquidity. Arbitrageurs bought UST (under $1) and sold it to the Terra Protocol for $1 worth of Luna and immediately sold it on the market at a profit, he added. But this mechanism can process due to only about 293 million US dollars per day log parameters set by Terra’s government. A so-called death spiral began.

“The Terra debacle shows that there is both a huge appetite for returns and a need for better alternatives with a more robust and sustainable design,” said Manuel Rensink, strategy director at Securrency. “We see strong opportunities for new entrants in the market for decentralized stability of value.”

The sell-off comes as lawmakers across the US scramble to set regulatory guidelines.

The Treasury Department will issue a “comprehensive report” on cryptocurrencies and stablecoins “soon,” Yellen said Tuesday in response to a request from the President’s Working Group on Financial Markets (PWG). She also stressed that Congress should also work on stablecoin legislation, saying it was “highly appropriate” to do so by the end of 2022.

Regulators and lawmakers need to analyze the differences between experimental algorithmic stablecoins like UST, over-collateralised ether-backed stablecoins like DAI and FEI, and fiat-backed stablecoins like USDC, which hold dollars, US Treasuries and other assets outside of the crypto- ecosystem.

“[With stablecoins,] We see run risks that could threaten financial stability, risks related to a payment system and its integrity, and risks related to increased concentration when stablecoins are issued by companies that already have significant market power,” Yellen said. “We definitely see significant risks.”

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The post “Terra turmoil adds fodder to Minister Yellen’s concerns about stablecoins” is not financial advice.

Source: Crypto News Austria

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