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Regulators anxious about stablecoins like tether after UST collapse

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The total stablecoin market has a value of more than $160 Billion.

Justin Tallis | AFP via Getty Images

After Terra’s collapse, regulators are becoming more concerned about stablecoins.

TerraUSDAn “algorithmic stablecoin” that can be pegged with one another. U.S. dollarThis week, after witnessing a spectacular bank collapse that caused billions to disappear from its market value, the, saw much of its value fall.

Also called UST, this cryptocurrency used a sophisticated combination of code and a floating token called luna, to balance supply/demand and stabilize prices. It also included a multibillion-dollar stack of UST. bitcoin.

TetherThe world’s largest stablecoin, tether, fell below $1 during the day, further fueling concerns of a potential contagion due to UST de-pegging. Unlike UST tether must be backed with sufficient assets that are kept in a reserve.

Janet Yellen, U.S. Treasury secretary addressed this issue directly. In a congressional hearing, Yellen said such assets don’t currently pose a systemic risk to financial stability — but suggested they eventually could.

According to her, she said Thursday: “I would not describe it at this size as a serious threat to financial security but they are growing very quickly.”

They present the same risks as bank run-related deaths for hundreds of years.

Yellen urged Congress for federal regulation of stabilitycoins before the year ends.

Also, the U.K. government has taken note. CNBC received Friday’s statement from a representative of the government confirming that stablecoins will be addressed in further steps after Terra collapse.

The spokesperson stated that the government had made it clear that some stablecoins were not appropriate for payment because they shared characteristics with unbacked cryptoassets.

Britain intends to bring stablecoins within the scope of electronic payments regulationTether and Circle could be subject to the supervision of the country’s markets regulator.

Stablecoins would be under the European Union’s separate proposals. strict regulatory oversight.

What exactly are stablecoins and how do they work?

These tokens are sort of crypto-casino chips. Tokens such as USDC or tether can be bought by traders with real dollars. These tokens are then used for trading bitcoin or other cryptocurrency.

This is how stablecoins can be sold. The amount of stablecoins that are in circulation is what the stablecoin issuers must have.

According to CoinGecko data, today’s stablecoin market is valued at more than $160 Billion. With a market worth of approximately $80 billion, Tether is world’s largest stablecoin.

Was UST a failure?

Instead of relying on a set of algorithms, UST used them. This is how it turned out:

  • If there are too many tokens available but not enough demand, the price of UST may drop below a dollar.
  • 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 lunaThis has a floating cost
  • Arbitrage was another system in play. This allowed traders to take advantage of price swings between the tokens.
  • One UST could be converted to $1 of luna. If UST were worth 98cs you could buy 1 luna, and swap it for luna to pocket 2 cents.

Luna, UST’s sister token is available now basically worthlessThis year, after previously surpassing $100 a piece earlier in the year.

The entire system was intended to stabilise 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. Experts agree that this is unsustainable.

Why is regulators concerned?

Tether, a large stablecoin issuer, is the main concern.

Yellen and U.S. officials often compared them with money market funds. In 2008, the Reserve Primary Fund — the original money market fund — lost its net asset value of $1 a share. A portion of the assets was held by Lehman Brothers in commercial paper, short-term corporate bonds. Investors fled Lehman Brothers’ collapse when the fund was insolvent.

Tether had previously claimed that all its reserves were made up of dollars. After settling with the New York attorney General in 2019, Tether changed its position. According to the company’s disclosures, it was short on cash and had a lot of commercial paper that wasn’t identified.

Tether claims it will reduce its commercial paper holdings and increase its U.S. Treasury bill portfolio.

Fitch, a ratings agency said Thursday that recent developments would lead to more calls for stablecoin regulation.

Fitch stated that while stablecoins, such as tether, may present a lower risk than algorithmsic ones like UST but it all comes down to creditworthiness.

According to the company, “Many regulatory financial entities have increased their exposures to cryptocurrencies and defi in recent months and some Fitch-rated issues could be affected should crypto market volatility become severe.”

There is also the risk that crypto assets values will fall sharply, which could have a negative impact on real economic activity. We view both the Fitch-rated issuesrs’ risks and actual economic activity as generally low.

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