Stablecoins give the illusion of security. Stablecoins give an impression that the coin you are holding is tied to the U.S. Dollar, or an equivalent to it in terms of stability and value, and can be converted to dollars quickly and easily. They do not, however, make such a thing. The recent collapse is a clear exampleLUNA token, TerraUSD stablecoin, and LUNA token. Also made evident in September 2008 by collapse of Reserve Primary Fund money fund at the height of global financial crises.

Powers On…Marc Powers’ monthly opinion column is published. He spent most of his career in America working on complex securities cases. He is now an adjunct professor at Florida International University College of Law, where he teaches a course on Blockchain & the Law.

Let’s see if the UST/LUNA breaks the buck price crash.

1. UST/LUNA was not a new or unique event. This happened in 2008 with the Reserve Primary Fund. It was spectacular and took a lot of hand-wringing. The Reserve Primary Funds money markets were no different. Investors in Terraform Labs’ stablecoin products weren’t insured by government aid.
2. This recent scandal will be the subject of several U.S. government hearings and investigations. To protect investors, those opposed to crypto will be calling for regulation of the whole nascent cryptocurrency industry. It is worth noting that the Reserve Primary Fund, which was also regulated as a mutual fund by the SEC, was subject to regulation. The fund was not able to withstand the ransomware. A knee-jerk approach to regulation is not an effective solution.
3. There should be regulation and a regulator of stablecoins, and the issuers, if not by the SEC, CFTC or Treasury. It is important to recognize the importance of these coins in the capital markets, as well financial transactions in crypto-related ecosystems. Stablecoins can be used by investors to ensure that the coins are properly secured and have unambiguous redemption rights.
4. Terraform Labs, and its founder Do KwonHe will also face civil and criminal investigation and legal proceedings stemming out of the UST/LUNA fall. Kwon is likely to be brought before both South Korean and American criminal prosecutors. It will likely be filed class actions. This will be a long and difficult process. The SEC opened investigations last fall into Mirror Protocol, another Terraform Labs project. On February 20, 2022, the Southern District of New York judge appointed Mirror Protocol as its investigator. gehaltenTerraform Labs was required to cooperate with Kwon and the SECs investigation subpoenas. Both will be worse off now that UST/LUNA is in effect.
5. Coinbase (NASDAQ 🙂 included a risk disclosure in their filings, it was revealed just days after the UST/LUNA runs. In the event that it goes bankrupt, its customers may be considered as unsecured creditors by the centralized exchange. This places the customer front and centre. What I wrote last yearCoinbase, Gemini and other exchanges are not licensed by the New York BitLicense system. It is of immense importance. It means customer accounts cannot be protected by SIPC up to $500,000 in cash or securities, and neither stock exchange can be subject to the SECs segregation regulations for customer assets.

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