Stablecoins In Regulators’ Crosshairs After Terra Collapse

StablecoinReg

After Terra’s collapse last week, regulators across the globe have started to take aim at stablecoins. 

Most of the regulatory concerns have been focused on algorithmic stablecoins like Terra’s UST.  Unlike fiat-backed stablecoins like USDC and Tether which are collateralized by fiat currency or other securities, algorithmic stablecoins maintain their peg to their benchmark, usually the US dollar, via algorithmic operations encoded in their smart contracts. 

On May 20, Bloomberg reported that Senator Cynthia Lummis, a Republican, and Senator Kirsten Gillibrand, a moderate Democrat, are working together on a proposal that aims to prevent crises like Terra’s collapse. Their proposed bill would require stablecoins to keep 100% reserves on hand and maintain a 1-1 peg with those assets, thus ending innovation around algorithmic stablecoins.

U.S. Secretary of the Treasury Janet Yellen said it was “urgent” for Congress to pass new legislation.  “[Stablecoins] run risks which could threaten financial stability,” Yellen testified in a Senate Banking Committee hearing on May 10. “Risks associated with the payment system and its integrity, and risks associated with increased concentration if stablecoins are issued by firms that already have substantial market power.”

Jake Chervinsky, Head of Policy at the Blockchain Association, had a more positive outlook. “UST was in a category of its own, relying solely on its algorithmic mechanism, a risky model that many predicted might fail”, he tweeted.  “That’s far different from the many collateralized stablecoins, custodial & decentralized, which all performed well during this week’s high volatility.”

The Security and Exchange Commission (SEC) recently doubled their crypto unit staff to crack down on abuses. “The bolstered Crypto Assets and Cyber Unit will be at the forefront of protecting investors and ensuring fair and orderly markets in the face of these critical challenges,” SEC Chair Gary Gensler said in a statement.

Outside the U.S.

In the United Kingdom, a spokesman for Her Majesty’s Treasury revealed that it is open to stablecoins being used for payments, but does not plan to include algorithmic stablecoins.  Fiat-backed stablecoins “have the capacity to potentially become a widespread means of payment,” the government said in a report issued last month. “An amended e-money framework can deliver a consistent framework to regulate stablecoin issuance and the provision of wallets and custody services.”

The Bank of Canada’s Stablecoin Assessment Framework was last updated on April 8, 2021, but notes that “although stablecoins make up a small share of the cryptocurrency market, they have the potential to improve the supply and scope of financial services. However, depending on their design and evolution, this efficiency could come with significant risk to financial stability.”

In South Korea, TerraForm Labs and its founder Do Kwon are getting sued by a major law firm for tax evasion.  The Block reported that law firm LKB & Partners will file its case against Kwon, a Korean national, on behalf of ordinary investors.

Stablecoins Under Pressure

Despite Terra spending $3B and Do Kwon’s plan to revive the ecosystem, UST has completely collapsed and now sits at $0.06. Since Terra’s collapse, the entire algorithmic stablecoin sector has been shaky.

Vai (VAI) fell as low as $0.87 on May 10, but now sits at $0.94. Neutrino USD (USDN) dropped to $0.70 on the morning of May 12, and has since recovered to $0.96.

Asset-backed stablecoins tell another story. USDC and DAI have stayed stable at their dollar pegs.  Although USDT dropped to $0.95 on May 12, it now sits squarely at the $1 mark. 

The stability of fiat-backed stablecoins begs the question – is this the end of algorithmic stablecoins? 

Messari analyst Dustin Teander told The Defiant that it depends on how you define “algorithmic stablecoins”.  If you classify algostables as those with zero or less than 20% of collateral, then it’s a resounding “yes”.  He clarified that he thinks models like Frax – which have high collateral factors – are here to stay.

Get smarter on DeFi and Web3

Get the 5-minute free newsletter keeping 60K+ crypto innovators in the loop.

No spam. Unsubscribe anytime.

Trending Now

CelsiusWithdrawalsPaused
Celsius Defies Fear of Implosion as Token Soars 218%
MarketsPump
Crypto Markets Sustain Rally After Monster Rate Hike
UniswapLPFeesPassETH
Uniswap Tops Ethereum in Terms of Daily Fees

Recent Jobs