Terra's collapse has regulators worried about stable coins.
TerraUSD, a stable coin that is supposed to be pegged to the U.S. dollar, has lost much of its value this week after a huge run on the bank.
A floating token called luna was used to balance supply and demand, as well as a multi-billion dollar pile of the digital currency, known as UST.
The world's biggest stable coin, tether, fell below its intended $1 for several hours on Thursday, fueling fears of a possible domino effect from the de-pegging of the US Treasury. tether is supposed to be backed by assets in a reserve.
This week, the U.S. Treasury Secretary directly addressed the issue of UST and tether. In a congressional hearing, she said that such assets don't currently pose a systemic risk to financial stability.
She told lawmakers that they are growing very rapidly, but that they are not a real threat to financial stability.
They present the same kind of risks that we have known about for a long time.
Congress should approve federal regulation of stable coins by the end of the year.
The U.K. government is paying attention. The government is ready to take further action on stable coins after Terra collapsed.
The government has made it clear that certain stable coins are not suitable for payment as they share characteristics with unbacked assets.
Britain is planning to bring stablecoins within the scope of electronic payments regulation, which could see issuers such as Circle become subject to supervision by the country's markets watchdog.
Stable coins would be subject to strict regulatory oversight under separate proposals in the European Union.
They are similar to casino chips for the world of digital currency. Real dollars are used to buy tether orUSDC. The token can be used to trade cryptocurrencies.
The idea is that when someone wants to cash in, they can get the equivalent amount of dollars for any stable coins they want to sell. Stable coin issuers hold enough money to correspond to the number of coins in circulation.
The market for stable coins is worth more than $150 billion. The market value of tether is about $80 billion.
UST is a unique case in the stable coin world. Unlike tether, it didn't have any cash to back its peg to the dollar, but it was partially backed by bitcoin.
UST relied on a system. It went like this.
Luna is worthless after having topped $100 a coin earlier this year.
The whole system was designed to keep UST at $1. It crumbled under the weight of billions of dollars in liquidations, particularly on Anchor, a lending platform that promised users interest rates as high as 20% on their savings. This was unsustainable according to many experts.
The main fear is that a major stable coin issuer could experience a run on the bank.
Money market funds are often compared to money market funds by officials. The Reserve Primary Fund lost its net asset value in 2008. Some of the fund's assets were in commercial paper from Lehman Brothers. When Lehman collapsed, investors fled.
Tether had previously said its reserves were entirely of dollars. The position was reversed after a settlement with the New York attorney general. The firm had very little cash but a lot of paper.
The company says it is increasing its holdings of U.S. Treasury bills.
The ratings agency said in a note that they expect recent developments to lead to increased calls for regulation of stable coins.
Stable coins like tether can be more manageable than algorithmic ones, but the creditworthiness of the firms that issue them is more important.
Many regulated financial entities have increased their exposure to cryptocurrencies, defi and other forms of digital finance in recent months, and some issuers could be affected if the market becomes volatile.
There is a risk of an impact on the real economy if the value of thecryptocurrencies falls steeply. We think the risks to issuers and economic activity are very low.
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