Blockchain and Crypto, Member Exclusive

Bankchain Briefing: ‘Don’t invest in something you don’t understand’: Insiders on the implications and impact of the UST collapse

  • For this week’s briefing, I asked three crypto experts to share their views on how the UST collapse will impact stablecoins, as well as the rest of the industry.
  • In other news, we recently held our first Bankchain Conference, where we heard from industry leaders about the intersection of TradFi and DeFi. Expect to see some great content from us around that theme in the coming weeks.
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Bankchain Briefing: ‘Don’t invest in something you don’t understand’: Insiders on the implications and impact of the UST collapse

It’s all anyone has been talking about for the last few weeks – at least within crypto circles.

When South Korean crypto firm Terra’s now-highly-controversial UST stablecoin collapsed, it caused panic and confusion in many parts of the industry, as well as among financial firms that had been watching the space from the outside with cautious curiosity.

There’s been a great deal of coverage about the reasons behind the collapse, as well as the differences between algorithmic and collateralized stablecoins, and why they play an important role in helping us make sense of this entire episode.

But a few weeks on, as the dust slowly begins to settle, I wanted to get a general sense of how people from within the crypto world think this event will impact the adoption of stablecoins, as well as the future of the industry as a whole.

Here’s how three industry insiders see it.

In the aftermath of the UST crash, is stricter stablecoin regulation inevitable? And do you believe stricter regulation is also necessary for stablecoins to gain legitimacy?

Konstantin Richter, founder and CEO of Blockdaemon:

The UST crash will likely be a catalyst for regulators and lawmakers to get involved in the stablecoin industry. As reported by Bloomberg, Sarah Pritchard, executive director for markets at the UK Financial Conduct Authority, stated that recent market instability in stablecoins “will absolutely need to be taken into account” when it starts working with the Treasury to write and implement new rules for crypto assets later in 2022. 

Ultimately, stricter crypto regulation will be designed to protect retail consumers. Many individuals have posted stories of losing their savings as a result of the crash. Stablecoins are designed to be stable. Without this stability, they lose their legitimacy, with or without underlying regulation.

When a product doesn’t deliver and customers suffer massively as a result of broken promises, it makes sense that regulators will step in to protect the consumer. History has shown time and time again that regulation is born out of billion-dollar collapses, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act following the 2008 financial crisis.

Sam Callahan, Bitcoin analyst at Swan Bitcoin:

I believe that stricter stablecoin regulation is inevitable at this point. Regulators have had stablecoins on their radar for a long time, and now after mom-and-pop investors lost their life savings on this Luna/UST collapse, they are bound to accelerate their efforts to regulate the space.

I think stablecoins have already gained legitimacy, and many are already regulated. This is evident by their explosive adoption over the last couple of years. Innovation brings about actual adoption, which brings about scams, which leads to regulation. It is my hope that regulators will introduce regulation in a way that protects consumers but doesn’t stifle innovation.

Has this crash proven that algorithmic stablecoins are too risky? Do you think they will be driven out of the market?

Konstantin Richter, Blockdaemon:

This crash has added a massive extra layer of scrutiny to other algorithmic stablecoins. For other projects, the question will be if they’re able to successfully defend their peg to their currency of choice. This event has shown that even the most well-capitalized project can collapse under enormous pressure from the market. The Luna Foundation Guard sold over 33k BTC in an attempt to prop up the peg under unrelenting sell pressure. Even billions of dollars’ worth of support was not enough to save UST. 

Other algorithmic stablecoins will need to prove that they can survive the same (or greater) extreme market conditions that led to UST’s demise. However, it’s really difficult for a project to prove this before such an event happens. There are simply too many variables. When dealing with well-capitalized, anonymous, sophisticated counterparties, the attack vector on algorithmic stablecoins remains massive. 

Ian Kane, co-founder and CEO of Unbanked:

I think there will be more algorithmic stablecoins that come up with “improved” models, but at the end of the day, there is always risk. The US can enforce it to some extent, but not everywhere, as anyone in any country could develop the next algorithmic stablecoin. Most people didn’t understand how Terra/Luna/UST worked, and were lured in by the attractive APY. Just because it called itself “stable” doesn’t mean it was. The old adage is true – don’t invest in something you don’t understand, and don’t put in more than you’re willing to lose.

How would this affect collateralized stablecoins like USDT and USDC? Will it drive more attention towards them, or will it reduce investor confidence in stablecoins as a whole?

 


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