The collapse of the algorithmic peg mechanism that fixed the price of Terra’s USD stablecoin (UST) and the unmooring of Tether from its USD peg shows the brittle nature of private stablecoins and will fuel calls for regulation. Terra is one of the largest stablecoins, but its market value on 8 May before the pressure on its peg was only around $18.6 billion, below that of larger stablecoins like Tether ($83.2 billion) or USD Coin ($48.7 billion).
“Burn burn burn,” Tether chief technology officer Paolo Ardoino tweeted on Thursday, accompanied by a screenshot showing the Whale Alert burns.
Algorithmic stablecoins have struggled to win regulatory acceptance, as they can face particular risks in maintaining a stable value. In the case of UST, the backing entity’s crypto reserve was not sufficiently large to serve as a source of stability when the UST’s algorithmic peg mechanism came under speculative pressure. Over 10-12 May 2022, UST consistently traded at values well below $1. The largest stablecoin, Tether (USDT), also diverged from USD1:USDT1, though more marginally.
According to CoinCu, TerraUSD, which should be tentatively tied to the US dollar, fell to under $0.2 on Friday AM Asia time.
Many people believe that recent occurrences will fuel calls for stablecoin regulation. Janet Yellen, the US Treasury Secretary, has already stated that it demonstrates the necessity of establishing an adequate legal framework for stablecoins. The EU’s Markets in Crypto Assets regulation, which is nearing completion, will not allow the issuing of algorithmic stablecoins and will instead need bank-like regulation and reserves for systemic stablecoin issuers.
Given that UST’s troubles have caused wider crypto market volatility, investors will likely pay closer attention to the dangers associated with stablecoins and their reserve attestations. It is uncertain what effect this will have, but stablecoins with a lower risk profile may gain market share, or stablecoin investors may become less interested in stablecoins in general.
Although Tether is already a stablecoin landmark, it is difficult to avoid hazards. USDT’s market capitalization was at $79.29 billion at the time of publishing compared with $82.9 billion 24 hours ago, CoinCu data showed. The price of dollar-pegged USDT is now at $1.01, recovering from a 24 hour low of $0.98.
There could be significant negative repercussions for cryptocurrencies and digital finance if investors lose confidence in stablecoins. The latter play an important role in catalysing the crypto ecosystem more broadly, by providing a stable link to fiat-currency financial markets.
DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.
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