Regulators worried about stablecoins like Tether after UST collapse

The entire stablecoin market is now worth more than $160 billion.

Justin Tallis | AFP via Getty Images

Regulators are increasingly concerned about stablecoins following the collapse of controversial cryptocurrency company Terra.

TerraUSD, an “algorithmic” stablecoin designed to peg one-to-one to the US dollar, has lost much of its value this week after a stunning bank run that saw billions of dollars suddenly disappear from its market value.

Also known as UST, the cryptocurrency worked using a complex code mechanism in combination with a floating token called Luna to balance supply and demand and stabilize prices, and a multi-billion dollar chunk of Bitcoin.

Tether, the world’s largest stablecoin, also slipped below the envisaged $1 mark for several hours on Thursday, fueling fears of potential contagion from the aftermath of the UST defix. Unlike UST, Tether is said to be backed by sufficient assets in a reserve.

US Treasury Secretary Janet Yellen this week directly addressed the issue of both UST and Tether “breaking the buck”. In a congressional hearing, Yellen said such assets do not currently pose a systemic risk to financial stability – but suggested they may eventually.

“I wouldn’t call it a real threat to financial stability on that scale, but they’re growing very quickly,” she told lawmakers Thursday.

“They present the same risks that we’ve known about bank runs for centuries.”

Yellen has asked Congress to approve federal regulation for stablecoins by the end of this year.

The British government is also taking notice. A government spokesman told CNBC on Friday that it stands ready to take further action against stablecoins after Terra’s collapse.

“The government has made it clear that certain stablecoins are not suitable for payment purposes as they share characteristics with unsecured cryptoassets,” the spokesman said.

The UK plans to bring stablecoins within the scope of e-payments regulation, which could result in issuers like Tether and Circle being subject to oversight by the country’s market regulator.

Separate proposals in the European Union would also bring stablecoins under tight regulatory oversight.

What are stablecoins?

They are like casino chips for the crypto world. Traders buy tokens like Tether or USDC with real dollars. The tokens can then be used to trade Bitcoin and other cryptocurrencies.

The idea is that whenever someone wants to cash in, they can get the equivalent amount of dollars for as many stablecoins as they want to sell. Stablecoin issuers are said to hold a sufficient amount of money equal to the number of tokens in circulation.

Today, the entire stablecoin market is worth more than $160 billion, according to CoinGecko data. Tether is the largest in the world with a market value of around $80 billion.

What happened to UST?

UST is a unique case in the stablecoin world. Unlike Tether, it had no actual cash to support its purported peg to the dollar — though at one point it was partially backed by bitcoin.

Instead, UST relied on a system of algorithms. It went something like this:

  • The price of UST can fall below a dollar when there are too many tokens in circulation but not enough demand
  • Smart contracts — lines of code written into the blockchain — would step in to de-supply the excess UST and create new units of a token called Luna, which has a variable price
  • There was also an arbitrage system where traders were encouraged to profit from divergences in the price of the two tokens
  • The idea was that one UST could always buy $1 worth of Luna. So if UST was worth 98 cents, you could essentially buy one, trade it for Luna, and make a 2 cent profit.

Luna, UST’s sister token, is now essentially worthless, having already surpassed $100 per coin earlier this year.

The whole system is designed to stabilize UST at $1. But it collapsed under the pressure of billions of dollars in liquidations — particularly on Anchor, a lending platform that promised users interest rates of up to 20% on their savings. Many experts say this has not been sustainable.

Why are regulators concerned?

The main fear is that a major stablecoin issuer like Tether could see a “run on the bank” next.

Yellen and other US officials have often likened them to money market funds. In 2008, the Reserve Primary Fund – the original money market fund – lost its NAV of $1 per share. The fund held some of its assets in commercial paper (short-term corporate bonds) issued by Lehman Brothers. When Lehman went bankrupt, investors fled.

Previously, Tether said its reserves consisted entirely of dollars. However, that position was reversed after a 2019 settlement with the New York Attorney General. Disclosures by the company showed that it had very little cash but many unidentified commercial papers.

Tether now says it is reducing the size of its commercial paper and increasing its holdings of US Treasury bills.

“We expect that recent developments will lead to increased calls for regulation of stablecoins,” rating agency Fitch said in a statement on Thursday.

While the risks of stablecoins like Tether “can be more manageable” than algorithmic ones like UST, according to Fitch, it ultimately depends on the creditworthiness of the companies issuing them.

“Many regulated financial firms have increased their exposure to cryptocurrencies, defi and other forms of digital finance in recent months, and some Fitch-rated issuers could be impacted if crypto market volatility spikes,” the company said.

“There is also a risk of an impact on the real economy, such as negative wealth effects, if crypto asset values ​​fall sharply. Nevertheless, we see the risks for Fitch-rated issuers and real economic activity as a whole as very low.” Regulators worried about stablecoins like Tether after UST collapse

Jane Marczewski

World Time Todays is an automatic aggregator of the all world’s media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, all materials to their authors. If you are the owner of the content and do not want us to publish your materials, please contact us by email – The content will be deleted within 24 hours.

Related Articles

Back to top button