In April Payments Cards & Mobile published excerpts of a speech by Fabio Panetta where the Member of the Executive Board of the ECB, started his speech “…Greed and lawlessness turned this promised land into the Wild West, where the few exploited the dream of the many.”
May stablecoin bloodbath continues
Panetta was referring to the “illusory narrative of ever-rising crypto-asset prices to maintain inflows and thus the momentum fuelling the crypto bubble.”
One week later we published an article entitled Stablecoin invasion – The next big thing in crypto? The article goes onto argue that whilst cryptocurrencies are hugely volatile, the increase in awareness of stablecoins and their “stable” nature was a good thing and attracting serious and institutional investors.
Then May happened
Stablecoins, it turns out, may not be so stable after all. These digital assets, which are pegged to the value of government-issued currencies, are meant to be the safest part of the volatile crypto market.
Their supposed fixed value has made them a cornerstone of the crypto ecosystem. But stablecoins are failing to live up to their billing.
Tether, the largest of these tokens with about $82 billion in circulation, briefly lost its peg. It fell to as low as 95.08 cents before bouncing back, but not before causing a considerable run.
The decoupling, however brief, should worry the broader market. The size of the stablecoin industry — $180 billion as of March, according to the Federal Reserve — makes it a source of potential systemic risks. The ECB thinks likewise.
In the case of Tether, as of the end of December, cash and bank deposits made up only 5% of its assets – according to the FT.
Treasuries accounted for about 44% while commercial paper and certificates of deposit made up another 30%.
If Tether decides to liquidate its $34 billion of Treasury holdings or its $24 billion of corporate debt holdings to defend the token, that will have repercussions for bond yields and the prime money market.
More worryingly, about 6% — or $5 billion — of its reserves are in other investments including other cryptocurrencies. These could prove to be more illiquid and hard to sell in times of stress.
Stablecoin Luna-tic
Now, Luna is imploding to the tune of $40 billion.
Run by CEO Do Kwon, he co-founded Terraform Labs in Singapore with Daniel Shin, the prominent founder of South Korean e-commerce platform Ticket Monster.
The pair launched the terraUSD stablecoin in 2020. Terra should hold a steady value of $1. Its dollar peg was maintained by an algorithmic relationship with the luna cryptocurrency.
To buy terra, users need luna, and vice versa. This see-saw dynamic is meant to keep the price of terra stable, but in early May, well we know that story.
As the luna supply was sold off, the value of the cryptocurrency plummeted towards zero, undermining the ecosystem’s delicate algorithmic balance and breaking terra’s peg to the dollar.
The “Luna Foundation Guard”, a non-profit supportive of the terra ecosystem, failed to mobilise enough bitcoin reserves to safeguard the stability of terra, and faith in the model evaporated.
“The coin’s market cap grew too big too fast when their reserves or tools to defend their value were not ready yet,” said a close former colleague of Kwon. “They began to prepare reserves, buying $3.5 billion of bitcoin, but it was too late.”
When Do Kwon was asked about the injection of $300 million into the reserves that underpinned the 20% yield on the cryptocurrency, a Twitter user asked him where the money would come from. Kwon’s response was “Your mom, obviously.”
South Korean prosecutors have since launched an investigation into Kwon’s Terraform Labs after five local crypto investors with combined damages of Won1.4 billion ($1.1 million) filed a criminal complaint alleging fraud and breach of financial regulations.
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