🪙 The Volatility Of "Stable" Coins
What happens when a cryptocurrency that is supposed to stay stable at $1 suddenly loses 70% of its value? Such was the case with TerraUSD (or UST), a cryptocurrency that was pegged to another cryptocurrency called a Luna Token, that recently collapsed. First, how does it work? One UST was always set to be exchangeable for $1 worth of Luna. That means that if UST is worth 50 cents, you can buy a dollar's worth of it (2 UST) and then trade them for 2 Luna at the $1 per exchange rate (so, 2 UST = $2 worth of Luna) and now your investment just doubled. So what went wrong? Earlier this month, about $2 billion of UST were suddenly depegged (taken out of this UST/Luna exchange) and the currency went haywire. Now Luna is worth one cent, and UST is worth 30 cents (if you buy a dollar’s worth of UST, you can no longer "uptrade it" into Luna and profit). Suffice to say, no one is buying, and a lot of people lost a lot of money.
There's one massive roadblock to UST's worth: only $100 million of UST can be exchanged for Luna per day.
It's unclear who unpegged the $2 billion in UST or why, notes CNET, though some speculate it was a coordinated attack on UST to short the currency.
Trouble For Crypto
“The question in our minds becomes, does what happened to UST spread to other stablecoins?” Mike Boroughs, the co-founder of crypto investments firm Fortis Digital, told CNET. “If big whales found a playbook here that works to attack UST, we worry they may reuse that playbook in other areas of the market.” In fact, all this volatility has intensified calls for regulation on crypto. “If you look at the risks we need to address, they are multiple and there is a wall of worry about this (crypto) in the conversations at an institutional level,” Ashley Alder, chair of the International Organization of Securities Commissions (IOSCO), said, reports Reuters. A global crypto regulating body may form by next year, and the SEC is already in talks about imposing rules on stablecoins.
Sometimes it takes a catastrophe to bring about regulation, and TerraUSD's collapse may be just the watershed moment that crypto needed to become a more regulated market.