The crisis of one of the largest stablecoins on the planet has worsened, raising concerns from regulatory authorities about the assets that back the global cryptocurrency market.
TerraUSD, which seeks to consistently follow the US dollar at a rate of US$1, plunged to the US$0.30 mark this Wednesday (11), in one of the most visible examples so far of a stablecoin losing its anchor. Stabilization efforts led by the Luna Foundation Guard — which plays a similar role to that of a central bank for digital currency — have failed.
The value of TerraUSD is also pegged to another token, the Luna cryptocurrency, which is in decline. The asset plunged more than 94% on Wednesday, hitting a low of $0.85 before rebounding to $1.20.
The episode stoked financial regulators’ concerns about the rising risks of the $180 billion stablecoin sector to traditional markets as the integration between cryptocurrencies and conventional payment and banking systems increases.
“A stablecoin known as TerraUSD has experienced a run and has plummeted in value,” US Treasury Secretary Janet Yellen said Tuesday. “I think this simply illustrates that this is a fast-growing product and that there are risks that grow just as fast.”
Stablecoins are intended to provide a safe haven for cryptocurrency investors, allowing them to maintain reserves of digital money and move quickly between different cryptocurrencies. They generally claim to be backed by a basket of dollar-denominated assets.
TerraUSD, which earlier this week was among the top five most-traded stablecoins on the market, is different. It is a so-called algorithmic stablecoin that seeks to keep up with the US dollar by raising or lowering the amount of currency in circulation when its value and that of the dollar diverge, in part through its link to Luna.
Whatever framework exists behind stablecoins, regulatory authorities have been concerned about their role for some time now. The Fed (Federal Reserve), the central bank of the United States, the ECB (European Central Bank) and the Bank of England have issued warnings about the rich of stablecoins, and particularly about their links to the traditional financial system.
In its regular financial stability report released this week, the Fed pointed out that just three of them – Tether, USD Coin and Binance USD – account for about 80% of the total market. The central bank warned that even reserve-backed stablecoins “can lose value or become illiquid during times of wear and tear”, adding that “these vulnerabilities can be exacerbated by a lack of transparency regarding the degree of risk and liquidity of the assets that back the stablecoins”.
Ilan Solot, a partner at cryptocurrency group Tagus Capital, said that “the knee-jerk reaction is to portray the fiasco [da TerraUSD] as bad news from a regulatory point of view — and that may well be true.” However, he said the situation may serve to illuminate the differences between logarithmic and basket-backed stablecoins. of foreign exchange.
The TerraUSD situation, which emerged during a week of intense volatility in cryptocurrency markets, exacerbates broader concerns about the largely unregulated stablecoin industry. Tether, the market’s leading currency, offers limited details of its specific positions in traditional financial assets, which back its parity with the dollar. In October 2021, the Commodity Futures Trading Commission, which oversees US financial futures markets, fined Tether $41 million after the company allegedly made “false or misleading statements and omitted material facts” about its reserves.
In a research note released on Wednesday, bank UBS said that the TerraUSD episode “is also expected to intensify regulatory authorities’ attention to USDC and Tether, which, while not yet systemically important to the payment and clearing system broader, function as the centerpieces of the cryptocurrency transaction industry”.
In a series of Twitter messages Wednesday, Do Kwon, founder and CEO of TerraUSD, told members of the “Terra community” that “I understand that the last 72 hours have been extremely difficult for all of you – know that I am determined to work with each of you to resolve this crisis, and to build our way out of it. Together.”
Financial Times, translated by Paulo Migliacci
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