The value of the cryptocurrency market collapsed this week after the so-called stable coin lost more than 70% of its value. This decline caused shock waves in the cryptocurrency ecosystem, with the world’s largest stable coin, the Tether, falling below its fixed value of $ 1.

Stablecoins are thought to be a more reliable form of cryptocurrency than highly volatile tokens such as bitcoin, with the UK government announcing plans last month to regulate stable coins as a payment mechanism. But the collapse of the cryptocurrency this week, caused by Terra’s problems, could undermine attempts to encourage the adoption of stable coins.

Tether’s value fell below $ 1 today. (Photo by Tiffany Hagler-Geard / Bloomberg via Getty Images)

Crypto Collapse: What Happens to Stable Terra and Tether Coins?

Stablecoin is a type of cryptocurrency whose value is related to the performance of a conventional fiat currency, such as the US dollar. Therefore, it can usually avoid unusual fluctuations in value, while maintaining the confidentiality and immediate payments offered by cryptocurrencies. A “reserve” of fiat currency, equivalent to the amount of stable coins in circulation, is held by the issuer as an additional level of security.

However, new forms of stablecoins are emerging. One example is Terra, which uses an algorithmic system to ensure that the value of the currency remains stable. This system failed this week, and the value of Terra has dropped from its usual price of about $ 1 to just 26 cents this morning. according to the market tracker Coinbase.

Do Kuon, co-founder of Terraform Labs, the Singapore-based company behind Terra, has promised consumer action, but no details have been released.

Terra’s problems have had an impact on the entire crypto market, which today fell to $ 1.2 trillion, its lowest level in more than a year. Indeed, the unrelated company’s cryptocurrency, Luna, has been wiped out almost all of its value, costing more than $ 60 just three days ago.

This affected Tether, the world’s largest stable coin, which fell to 94 cents early Thursday morning before recovering to 99 cents at the time of writing. With a total value of $ 80 billion, Tether is expected to be fixed at $ 1, as its founders say it is backed by an equivalent reserve of dollar-based assets. However, this was called into question by the organization refusing to provide detailed information on these assets.

In October, Tether was fined $ 41 million by the US Commodity Futures Trading Commission for misleading statements he made between 2016-2019, which suggests that he is fully backed by cash reserves.

What does the collapse of crypto mean for stable coins?

The main use of stablecoins at the moment is to provide “vehicle currency”, a stable intermediary for consumers who want to trade fiat currencies for cryptocurrencies and vice versa. Speaking of Technical monitor Earlier this year, Professor Ganesh Viswanat-Natraj, a financial assistant at Warwick Business School, said: “There are many cases of using stablecoins, but they are mainly in the crypto field. They are mainly used as the currency of vehicles in the crypto market and this is a function that they perform extremely well. “

However, others argue that stablecoins can act as digital currencies for consumers and businesses to use as a method of payment for goods and services. The most famous project in this area was Diem, a stable coin supported by the parent company Facebook, Meta, as well as Visa and Mastercard. However, this was repealed in January after a number of regulatory problems.

Last month, the UK government announced plans to expand e-money regulations in the country to include stable coins so they can be used as a payment mechanism. “[W]appropriate regulation, [stablecoins] it can provide a more efficient means of payment and expand consumer choice, “the government said after a public consultation.

Other regulators have questioned the broader stability of stable coins. This is stated in a report on the financial stability of the US Federal Reserve, published earlier this week stablecoins are vulnerable to bank runsand that a lack of asset transparency could exacerbate this vulnerability.

At the same time as stablecoils are struggling, the popularity of central bank digital currencies (CBDCs) is growing. These are a type of currency with direct support from a country’s central bank and thus offer even more confidence than a private stable coin, as there is no danger of their financing becoming as opaque as Tether’s. As reported by Technical monitor last week, nine out of ten central banks surveyed by the Bank for International Settlements were working on CBDC projects.

The crypto crash this week and the problems facing Terra and now Tether suggest that the use of stablecoins as a widespread digital currency could be problematic.

Professor Viswanat-Natraj believes that even if more consumer-friendly coins are developed, CBDCs are likely to remain a better option for digital payments. “For something ambitious [like Diem] for that to happen, it will have to come from the banking system, “he said. I’m not sure if it would be more profitable than CBDC, which will always be a little safer, because there is direct support from the government, while private stable coins can always face the risks of “bank leakage” where there is no sufficient reserves to cover the requirements deposited. “

Read more: The United Kingdom will regulate stable coins and issue NFT

Crypto crash reveals stablecoins like Terra and Tether are not so stable

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