Stablecoins are cryptocurrencies linked to a physical asset and pegged 1:1 to the US dollar. TerraUSD, sometimes known as UST, is an algorithmic stablecoin linked to the US dollar.
UST was managed by an algorithm, unlike stablecoins like Tether and USD Coin, which are backed by real-world assets like fiat currencies and treasury securities to preserve its dollar peg.
When UST lost its dollar peg, it triggered a sell-off in its sister coin Luna, which plummeted from $ 118 to $0.
The fiasco has prompted concerns that algorithmic stablecoins may be doomed.
“While it’s terrible that the money… was lost, it’s not surprising. It’s a stablecoin with algorithmic backing. So it’s simply a bunch of smart people figuring out how to peg something to the dollar,” Reeve Collins, co-founder of digital token business BLOCKv, told last week at the World Economic Forum in Davos, Switzerland.
“And in the last two months, many individuals withdrew their money because they understood it wasn’t sustainable.” As a result, the crash had a cascade effect. And it’ll almost certainly spell the death for most algo stablecoins.”
Collins is also one of the co-creators of Tether, an algorithmic stablecoin. On the other hand, Tether’s issuer asserts that it is backed by cash, US Treasury bonds, and corporate bonds. Tether lost its dollar peg temporarily during the crypto market turbulence last month before restoring it.
People will continue working on algorithmic stablecoins, according to Jeremy Allaire, CEO of Circle, another of the companies behind the issue of the USDC stablecoin.
“I’ve compared stable algorithmic currencies to the Holy Grail or the Fountain of Youth.” It’s been dubbed “financial alchemy” by some. As a result, financial alchemists will continue to work on the magic potion that will allow them to build these things and find the Holy Grail of a stable value, algorithmic digital currency. So I anticipate to continue pursuing that,” Allaire said last week.
“What happens with legislation around it, on the other hand, is a separate thing.” Are there clear lines between what or who can engage with the market and who can’t? Given the inherent risks, what can interact with the financial system,” he noted.
Demand for regulations is increasing.
Regulators and governments all around the world have been paying attention to stablecoins. In the United States, Senate Banking Committees Majority Leader Pat Toomey (R-Pa.) issued a draft set of guidelines on stablecoin regulation earlier this year.
Last month, US Treasury Secretary Janet Yellen encouraged legislators to approve laws regulating stablecoins.
The UK government revealed plans to regulate stablecoins in April. The British government also proposed amending existing legislation to deal with the failure of stablecoin enterprises that could represent a “systemic” danger on Tuesday.
After the fall of terraUSD, the crypto industry expects greater regulation on stablecoins. According to Bertrand Perez, CEO of the Web3 Foundation and a former director of the Facebook-supported Diem stablecoin project, Regulators are likely to insist that real assets back such cryptocurrencies.
“So I think that if we have a clear regulation of stablecoins, the basic requirements of the regulation would be that you have a clear reserve with a set of robust assets and that you’re subject to frequent audits of those reserves,” Perez said.
“So you can hire an auditing firm to come in regularly to ensure that you have adequate reserves and the proper processes and safeguards to deal with bank runs and other negative market situations. This is done to ensure that your reserve is truly secure, not just when things are going well.”
