SEOUL, South Korea–One stablecoin is proving to be less than stable, and its led the Treasury secretary to call for regulations to be put in place.
TerraUSD, a stablecoin that is supposed to be pegged to the U.S. dollar, has been seeing a sell-off of the cryptocurrency that at one point had sent its price to a low of 23 cents, according to data from CoinDesk. It later partially rebounded to about 30 cents in volatile trading.
As CUToday.info has reported in its ongoing coverage of cryptocurrencies, stablecoins have found some favor among investors for their perceived stability. In the case of TerraUSD it is what is known as an algorithmic stablecoin, which relies on financial engineering to maintain its link to the dollar.
But TerraUSD’s value began to plunge following a series of large withdrawals by Anchor Protocol, a sort of decentralized bank for crypto investors, according to the Wall Street Journal.
“Anchor Protocol is built on the technology of the same Terra blockchain network that TerraUSD is based on,” the Journal reported. “It had been a major factor in the growth of the stablecoin in recent months by allowing crypto investors to earn returns of nearly 20% annually by lending out their TerraUSD holdings.”
The report further noted that at the same time, TerraUSD was also sold for other stablecoins backed by traditional assets through various liquidity pools that contribute to the stability of the peg, as well as through cryptocurrency exchanges.
“The sudden outflow of money spooked some traders who began selling TerraUSD and its sister token Luna,” the Journal stated. “Before its peg was broken, TerraUSD was the third-largest stablecoin with a total market value of $18 billion.”
‘The Grease that Moves the Gears’
Even as TerraUSD began regaining some value after hitting its low, Luna continued to fall. The token was down 97%, trading at 99 cents, at one point.
The Journal noted that stablecoins have surged in popularity the past two years and now act as the grease that moves the gears of the cryptocurrency ecosystem.
“Traders prefer to buy coins such as bitcoin, ether and dogecoin using digital assets that are pegged to the dollar because when they buy or sell, the price is only moving on one side,” according to the Journal. “They also allow for fast trading without the settlement times associated with government-issued currencies, which can take days.
Overall, the price of bitcoin fell to $29,460.20 earlier this week, and has lost 25% of its value over the past week.
Martin Hiesboeck, head of blockchain and crypto research at digital money platform Uphold, told the Journal what is happening with TerraUSD and Luna is similar to a bank run. “People don’t trust it anymore, they’re running for the exit,” he said.
Treasury Secretary Wants Rules in Place
TerraUSD’s decline prompted Treasury Secretary Janet Yellen to repeat her call for Congress to authorize regulations around stablecoins
“I think that simply illustrates that this is a rapidly growing product and that there are risks to financial stability,” Yellen said at a hearing Tuesday before the Senate Banking Committee. “We really need a consistent federal framework.”
A Treasury-led panel of regulators recommended last year that Congress write legislation that would regulate stablecoin issuers similarly to banks, reminded the Wall Street Journal.
Current laws don’t provide comprehensive standards for the new assets, Yellen told the Senate.
Pennsylvania Sen. Pat Toomey the committee’s top Republican, expressed an interest in moving quickly. “Do you think we could shoot for a goal of getting legislation done this year?” he asked.
“I think that would be highly appropriate,” responded Yellen.
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