What will happen to cryptocurrencies if stablecoins collapse?

Amid the wave of interest rate hikes as global central banks tighten monetary policy, investors have chosen to sell high-risk assets. The turmoil in the U.S. stock market has not yet subsided, and the cryptocurrency market has also suffered an unprecedented blow.

The price of the TerraUSD stablecoin has fallen to less than 10 cents over the past two weeks as holders continue to sell, rapidly moving away from its intended peg of $1.

Although the Luna Foundation Guard organization that supports the Terra project is trying its best to support it, industry insiders expect it to be difficult to recover to $1. Michael Safai, managing partner of cryptocurrency trading company Dexterity Capital, said, "The Terra ecosystem may never be able to recover, and many retail and institutional investors will lose a lot of money."

Causing panic in the cryptocurrency market

When the TerraUSD run spread to the entire cryptocurrency market, almost all cryptocurrencies and trading platforms were hit.

Stablecoins are currently used as heavily as traditional dollars in the cryptocurrency market and have become the main medium of exchange for payments, transactions, lending and other blockchain-based activities. According to Coin Market Cap, a large portion of the daily transaction volume of cryptocurrency transactions is completed through stablecoins.

In order to push up the TerraUSD price, some traders sold ETH while buying it, which put downward pressure on the price of ETH. The price of Bitcoin was also affected. Before the recent circuit breaker, the Luna Foundation Guard held $3.5 billion in Bitcoin. Some traders were worried that Terra would sell its Bitcoin reserves to support the TerraUSD price, so they began to sell Bitcoin driven by panic.

Wall Street analysts point out that if traders cannot trust that stablecoins can maintain a fixed value like a de facto "digital dollar," the entire cryptocurrency market may face a collapse in confidence.

Regulatory rules may be introduced

The TerraUSD crash not only shook the entire cryptocurrency market, but also attracted the attention of U.S. regulators. The U.S. Congressional Research Service (CRS) pointed out that the stablecoin industry is not "adequately regulated" and that there may be loopholes in the regulatory framework for stablecoins.

Currently, stablecoins are also replacing the US dollar in international remittances and cross-border payments. Like other cryptocurrencies, stablecoins run on blockchains and can be transferred between digital wallets without the need for intermediaries such as banks to track or process transactions, making it more difficult for governments to grasp the flow of capital.

In addition, U.S. regulators and lawmakers have expressed concerns about the liquidity of token issuers’ reserve assets, namely whether they can meet investors’ redemption requests, especially when millions of people request to redeem their tokens at the same time.

Recently, Binance, the largest virtual currency exchange in the market, suspended TerraUSD redemption transactions due to "network congestion". Regulators are concerned that if stablecoins, as privately issued digital currencies, are subject to a run, it could pose a risk to the broader financial market.

The U.S. government wants digital currency issuers to be regulated and even hold insurance from the Federal Deposit Insurance Corporation (FDIC). In a recent executive order on cryptocurrencies, U.S. President Biden called on Congress to pass oversight rules for stablecoins.

U.S. Treasury Secretary Janet Yellen also said at the Senate Banking Committee on the 10th: "The circulation of stablecoins is growing at a very fast pace, posing risks to financial stability. We really need a unified federal framework."

Statement: The copyright of this article belongs to the original author. If there is an error in the source or it infringes your legal rights, you can contact us and we will deal with it in a timely manner.