Stablecoin – The Defendant in the Regulators Crossshare after Terra Fall

Following the fall of Terra last week, regulators around the world have begun to target Stablecoin.

Most regulatory concerns have been focused on algorithmic stablecoins, such as Terra UST. Unlike fiat-backed stablecoins such as USDC and Tether, which are paralleled by fiat currencies or other securities, algorithmic stabilcoins keep their benchmarks, usually peg in US dollars, through algorithmic operations encoded in their smart contracts.

On May 20, Bloomberg reported that Senator Cynthia Lumis, a Republican, and Senator Kirsten Gillibrand, a moderate Democrat, were working together on a proposal aimed at preventing crises such as the fall of Terra. Their proposed bill would require stablecoins to maintain 100% reserves and maintain 1-1 pegs with those resources, thus ending the innovation around algorithmic stablecoins.

U.S. Treasury Secretary Janet Yellen says it is “urgent” for Congress to pass new legislation. “[Stablecoins] Take risks that could jeopardize financial stability, ”Yellen testified at a May 10 Senate banking committee hearing. “The risks associated with the payment system and its integrity, and the risk associated with increased density if stablecoin is issued by companies that already have sufficient market capability. “

Jack Chervinsky, head of policy at the Blockchain Association, took a more positive view. “The UST had a division of its own, relying solely on its algorithmic process, a risky model that many predictions may fail,” he said. Tweet. “It’s very different from a lot of parallel stablecoins, custodial and decentralized, which performed well during this week’s high volatility.”

The Securities and Exchange Commission (SEC) has recently doubled down on stopping the abuse of their crypto unit staff. SEC Chairman Gary Gensler said in a statement, “Strong crypto resources and cyber units will be at the forefront to ensure employer protection and a fair and orderly market in the face of this complex challenge.”

Outside the United States

In the United Kingdom, a spokeswoman for Her Majesty’s Treasury said it was open to the use of stablecoins for payments, but did not plan to include algorithmic stablecoins. Fiat-backed stablecoins have the potential to “potentially be a broader means of payment,” the government said in a report released last month. “A revised e-money framework could provide a consistent framework for controlling the issuance of stablecoins and the provision of wallet and custody services.”

The Bank of Canada’s Stablecoin Assessment Framework was last updated on April 8, 2021, but notes that “although stablecoins make up a small part of the cryptocurrency market, they have the potential to improve the delivery and scope of financial services. However, their design and evolution Depending, this skill could lead to significant risks to financial stability. “

In South Korea, TerraForm Labs and its founder Do Kwon are suing a major law firm for tax evasion. According to The Block, law firm LKB & Partners will sue Korean national Koe on behalf of ordinary investors.

Stablecoins under pressure

Terra spent $ 3B to revitalize the ecosystem, and despite Do Kwon’s plan, the UST completely collapsed and now sits at 0.06. Since the fall of Terra, the entire algorithmic stablecoin sector has been shaky.

Vai (VAI) fell to 0.87 on May 10, but now sits at $ 0.94. On the morning of May 12, the neutrino USD (USDN) fell to 0.70 and has since recovered to 0.96.

Wealth-backed stablecoins tell another story. USDC and DAI are stable on their dollar pegs. Although the USDT dropped to $ 0.95 on May 12, it now sits at the $ 1 mark in the square.

The durability of Fiat-backed stablecoins raises the question – is this the end of algorithmic stablecoins?

Mesari Analyst Dustin tender He told The Defiant that it depends on how you define “algorithmic stablecoin”. If you classify Algostable with a security of zero or less than 20%, it is a resounding “yes”. He makes it clear that he thinks models like Frax – which have a high parallel reason – are here to stay.

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