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Terra crisis stokes regulatory concerns over $180 billion stablecoin market

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A crisis engulfing one of the world’s largest stablecoins has deepened, stoking regulators’ worries about the assets that underpin the global cryptocurrency market.

TerraUSD, which seeks to consistently trail the dollar with a value of $1, fell to a low of 30 cents on Wednesday in one of the most high-profile examples yet of a stablecoin breaking its so-called peg. Attempts at stabilization by the Luna Foundation Guard – acting as a central bank for the token – failed.

The episode fueled concerns among financial regulators over the growing risks the $180 billion stablecoin industry poses to traditional markets as crypto becomes more integrated with conventional payments and banking systems.

“A stablecoin known as TerraUSD has had a run and lost value,” US Treasury Secretary Janet Yellen said on Tuesday. “I think it just illustrates that this is a rapidly growing product and there are some rapidly growing risks.”

Stablecoins are meant to provide a safe haven for crypto investors, allowing them to store digital money and easily switch between cryptocurrencies. Generally, they claim to be backed by a basket of dollar assets.

Terra, which ranked among the top five stablecoins on the market earlier this week, is different. It is a so-called algorithmic stablecoin, which seeks to follow the dollar by increasing or decreasing the amount of its coin in circulation when it deviates from the value of the dollar, thanks in part to a relationship with Luna, a cryptocurrency.

Regardless of the structure behind stablecoins, regulators have been concerned about their role for some time. The Federal Reserve, the European Central Bank and the Bank of England have all issued warnings about the risks of stablecoins, and in particular their links to the traditional financial system.

In its regular Financial Stability Report this week, the Fed noted that just three – Tether, USD Coin, and Binance USD – account for around 80% of the overall market.

He warned that even reserve-backed stablecoins “can lose value or become illiquid during times of stress,” adding that “these vulnerabilities can be exacerbated by a lack of transparency around the risk and liquidity of reserve-backed assets. stable coins”.

Ilan Solot, partner at crypto group Tagus Capital, said that “the knee-jerk reaction is to throw the [TerraUSD] debacle as bad news from a regulatory standpoint – and it could turn out to be”. However, he said it could also highlight the differences between algorithmic coins and those backed by a basket of reserves.

The TerraUSD situation, which occurred during a week of intense volatility in the crypto markets, adds to broader concerns about the largely unregulated stablecoin industry. Tether, the market leader, provides only limited details on the specific holdings of traditional financial assets that underpin its peg to the US dollar. In October 2021, the U.S. Commodity Futures Trading Commission fined Tether $41 million after the company allegedly made “false or misleading statements and omissions of material facts” regarding its reserves.

In a Wednesday research note, UBS said the TerraUSD episode “will likely heighten regulators’ focus on USDC and Tether, which, while not yet systemically important for payments, clearing and broader financial regulation, are the mainstays of the crypto trading industry.” .

In a series of Twitter posts on Wednesday, Terra co-founder Do Kwon told members of the “Terra Community” that “I understand that the past 72 hours have been extremely difficult for all of you – please know that I am resolute. to work with everyone. of you to get through this crisis, and we will get through this. Whole.”

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