Luna, the sister cryptocurrency to controversial stablecoin TerraUSD, has fallen to $0. The collapse of algorithmic stablecoin TerraUSD has raised questions about the future survival of similar crypto assets.
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Algorithmic stablecoins like terraUSD, which have crashed and sent shockwaves through the cryptocurrency market, have little chance of surviving, the co-founder of the digital currency tether told CNBC.
Stablecoins are a type of cryptocurrency that is usually pegged to a real-world asset. TerraUSD or UST, is an algorithmic stablecoin that was supposed to be pegged to the US dollar.
While stablecoins like tether and USD Coin are backed by real-world assets like fiat currencies and government bonds to maintain their peg to the dollar, the UST was algorithmically driven.
UST lost its peg to the dollar, which also led to a sell-off of its sister token luna, which crashed to $0.
The debacle led to warnings that algorithmic stablecoins may have no future.
“It’s a shame the money…was lost, however, that’s no surprise. It’s an algorithm-based stablecoin. So it’s just a bunch of smart people trying to figure out how to peg something to the dollar,” Reeve Collins, the co-founder of digital token company BLOCKv, told CNBC at the World Economic Forum in Davos, Switzerland last week.
“And a lot of people have withdrawn their money over the last few months, because they realized it wasn’t sustainable. So this crash had a cascading effect. And that’s probably going to be the end of most stablecoins algo.”
Collins is also the co-founder of tether, which is not an algorithmic stablecoin. But the tether issuer says it is backed by cash, US Treasuries and corporate bonds. In the crypto market turmoil last month, Tether also briefly lost its peg to the dollar before regaining it.
Jeremy Allaire, CEO of Circle, one of the companies behind the issuance of the USDC stablecoin, said he believes people will continue to work on algorithmic stablecoins.
“I have compared algorithmic stablecoins to the fountain of youth or the holy grail. Others have called it financial alchemy. And so there will continue to be financial alchemists who, who are working on the magic potion to create these things, and to find … the holy grail of stable value, an algorithmic digital currency, so I fully expect to pursue that,” Allaire told CNBC last week.
“Now what happens with the regulation around it is a different question. Will there be, you know, clear lines drawn on what can interact with the market. What can interact with … the financial system, given the risks that are embedded,” he added.
The crypto industry expects tighter regulations on stablecoins, especially after the collapse of terraUSD. Bertrand Perez, CEO of the Web3 Foundation and former director of the Facebook-backed stablecoin Diem project, expects regulators to require these cryptocurrencies to be backed by real assets.
“So I would expect that once we have clear stablecoin regulation, the ground rules for regulation would be that you have a clear stash with a strong set of assets, that you are subject to regular audits of those reserves,” Perez told CNBC last week.
“So you can have an auditing company that comes in regularly to make sure that you have the proper reserves, that you also have the proper processes and measures in place to deal with bank runs and other, say, conditions of negative markets, to make sure your stash is truly secure, not just when things are going well.”
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