spot_img
16.7 C
New York
spot_img
spot_img
HomeFinanceRegulators anxious about stablecoins like tether after UST collapse

Regulators anxious 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 getting increasingly worried about stablecoins after the collapse of controversial cryptocurrency venture Terra.

TerraUSD, an “algorithmic” stablecoin that’s meant to be pegged one-to-one with the U.S. dollar, has erased much of its value this week after a stunning run on the bank that saw billions of dollars suddenly evaporate from its market value.

Also known as UST, the cryptocurrency operated using a complex mechanism of code combined with a floating token called luna to balance supply and demand and stabilize prices, as well as a multibillion-dollar pile of bitcoin.

Tether, the world’s biggest stablecoin, also slipped below its intended $1 for several hours on Thursday, fueling fears of a possible contagion from the fallout of UST de-pegging. Unlike UST, tether is supposed to be backed by sufficient assets held in a reserve.

U.S. Treasury Secretary Janet Yellen directly addressed the issue of both UST and tether “breaking the buck” this week. In a congressional hearing, Yellen said such assets don’t currently pose a systemic risk to financial stability — but suggested they eventually could.

“I wouldn’t characterize it at this scale as a real threat to financial stability but they’re growing very rapidly,” she told lawmakers Thursday.

“They present the same kind of risks that we have known for centuries in connection with bank runs.”

Yellen urged Congress to approve federal regulation of stablecoins by the end of this year.

The U.K. government is also taking notice. A spokesperson for the government told CNBC Friday that it stands ready to take further action on stablecoins after Terra’s collapse.

“The government has been clear that certain stablecoins are not suitable for payment purposes as they share characteristics with unbacked cryptoassets,” the spokesperson said.

Britain is planning to bring stablecoins within the scope of electronic payments regulation, which could see issuers such as Tether and Circle become subject to supervision by the country’s markets watchdog.

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

What are stablecoins?

They’re sort of like casino chips for the crypto world. Traders buy tokens like tether or USDC with real dollars. The tokens can then by 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 however many stablecoins they want to sell. Stablecoin issuers are meant to hold a sufficient level of money corresponding to the number of tokens in circulation.

Today, the entire market for stablecoins is worth more than $160 billion, according to data from CoinGecko. Tether is the world’s biggest, with a market value of about $80 billion.

What happened with UST?

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

  • The price of UST can fall below a dollar when there’s too many tokens in circulation but not enough demand
  • smart contracts — lines of code written into the blockchain — would kick in to take the excess UST out of supply and create new units of a token called luna, which has a floating price
  • There was also an arbitrage system at play, where traders were encouraged to profit from deviations in the price of the two tokens
  • The idea was that you could always buy $1 worth of luna for one UST. So if UST was worth 98 cents, you could essentially buy one, swap it with luna and pocket 2 cents in profit.

Luna, UST’s sister token, is now basically worthless after having previously topped $100 a coin earlier this year.

The whole system was designed to stabilize UST at $1. But it crumbled under the pressure of billions of dollars in liquidations — particularly on Anchor, a lending platform that promised users interest rates as high as 20% on their savings. Many experts say this was unsustainable.

Why are regulators worried?

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

Yellen and other U.S. officials have often compared them to money market funds. In 2008, the Reserve Primary Fund — the original money market fund — lost its net asset value of $1 a share. The fund held some of its assets in commercial paper (short-term corporate debt) from Lehman Brothers. When Lehman went bust, investors fled.

Previously, Tether said its reserves consisted entirely of dollars. But it reversed this position after a 2019 settlement with the New York attorney general. Disclosures from the firm revealed it had very little cash but lots of unidentified commercial paper.

Tether now says it is reducing the level of commercial paper it owns and increasing its holdings of U.S. Treasury bills.

“We expect recent developments to lead to increased calls for regulation of stablecoins,” ratings agency Fitch said in a note Thursday.

While the risks of stablecoins like tether “can be more manageable” than algorithmic ones like UST, it ultimately falls down to the creditworthiness of the firms that issue them, according to Fitch.

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

“There is also a risk of an impact on the real economy, for example through negative wealth effects if crypto asset values fall steeply. Nonetheless, we view the risks to Fitch-rated issuers and real economic activity as being generally very low.”



(
Source)

latest articles

explore more