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?

Sam Callahan, Swan Bitcoin:

This will drive more attention towards fully collateralized stablecoins like USDT and USDC as investors flee riskier stablecoins. We are already seeing outflows of capital from other algorithmic stablecoins into collateralized ones as investors fear a price collapse similar to Luna/UST. This collapse has left a blackeye on the stablecoin industry as a whole, especially for investors or regulators who don’t fully understand the differences in the designs of different stablecoins. However, collateralized stablecoins that are fully redeemable and have serviced all redemptions remain in demand, especially in developing countries that want better access to dollar-like assets.

Ian Kane, Unbanked:

I think trustworthy institutions that can provide stability and liquidity on large stablecoin redemptions will be the clear winners here. In my opinion, today those are Circle and Paxos. Going forward, transparent, third-party audits into a stablecoin’s reserves are going to be paramount in order to retain trust. Stablecoins are the future, but like all things, it really depends on the one you choose to keep your value in. 

What short-term and long-term ripple effects do you think this will have on the crypto industry as a whole? Are we in for a long “crypto winter”?

Konstantin Richter, Blockdaemon:

In the short run, this will likely further the push for greater legislation in crypto. With billions of dollars wiped out by the UST crash, it’s unlikely that crypto will remain untouched from this regulatory scrutiny.

Following the rise of NFTs, the DeFi ecosystem and the fall of UST, there will hopefully be more clarity around asset classification in particular. That means there might be clearer definitions of utility tokens, stablecoins, and the roles and responsibilities of different entities. This would hopefully bring more business, regulatory and technical clarity for crypto projects going forward. In the long run, crypto isn’t going anywhere.

Ian Kane, Unbanked:

I think it’s fair to say we’re seeing a strong pullback in the near term. BTC went from almost $70k to $30k. Most other altcoins saw even larger drops. While this all makes for great headlines on publications, anyone who has been in crypto long enough knows this stuff is cyclical. 5 years ago, BTC was at $2k, so if we zoom out, its easy to see things are heading upward. 

I don’t know if we’re in for a long-term crypto winter of 2+ years or if this is a shorter-term shakeout before the next run-up to $100k BTC. No one really knows, and everyone should be cautious of those that claim to do.

The industry as a whole is growing, and venture capital will continue to pour in. What most people forget is that great companies are built in bear markets, so I continue to be bullish on the industry overall. Blockchain is the future of how people will send value to each other, and it all comes down to whether you want your value held in a fluctuating cryptocurrency or a stablecoin backed by government paper.

Andreessen Horowitz seems unfazed by the turbulent crypto market

The crypto winter doesn’t seem harsh enough to deter Andreessen Horowitz. FT reports that despite the market crash, the venture capital group has just launched a $4.5 billion cryptocurrency fund, making its biggest bet yet on the future of blockchain technology.

Andreessen says it will allocate around $1.5 billion to seed investments, while the remaining $3 billion would be earmarked for venture investments. The new fund is the fourth and largest from the VC group to focus on crypto investments, taking its total investment in the space to over $7.6 billion.

Despite the market downturn, Chris Dixon, managing partner and founder of Andreessen’s crypto arm, believes the space is reaching a new “golden era” in which “new talent, viable infrastructure, and community knowledge” would spur rapid innovation.

“We believe blockchains will power the next major computing cycle,” he said. “That’s why we’ve decided to go big.”

Dixon says the company is targeting startups of all stages in areas such as DeFi, decentralized autonomous organizations, NFT communities and creator monetization, among others.

Addressing the bear market, Arianna Simpson, general partner at Andreessen, said: “What we’ve seen is that many of the best protocols and companies are actually built during periods of market instability or downturns, because it really allows people to focus on the technology and building rather than being distracted by short-term price fluctuations.”

She added that the company was focused on “the five to ten-year horizon and beyond”.

And the winners of Tearsheet’s 2022 Bankchain Awards are…

As blockchain continues moving from the early adopters crowd and into the mainstream, financial institutions take up different strategies to incorporate cryptocurrency into their services, from trading to stablecoins to custody.

Tearsheet’s inaugural Bankchain Awards is the industry’s top awards program, recognizing and celebrating the best products, services, and partnerships between blockchain firms and the traditional banking system.

This year’s winners are a who’s who of important technology firms helping bridge the old world of TradFi with the new DeFi paradigm.

Awards included Best Crypto Rewards Offering, Best Marketing Campaign, Best Crypto Platform, and more.

See which firms came out on top here.

Highlights from our recent coverage

Is the market ready for crypto-based rewards?

Loyalty programs are witnessing a revamp as crypto-based rewards enter the market. In this quickly developing space, we ask: What incremental value are crypto rewards bringing to the industry? How are they changing traditional rewards programs? How savvy does the market need to be for them to become mainstream?

Sounds unstable: fluctuations in Terra and GYEN stablecoins make billions disappear

Issues with coins like GYEN and UST have shaken trust in stablecoins. Since stablecoins are supposed to be immune to the volatility attributed to other cryptocurrencies, this strikes at the heart of what investors fear about cryptocurrencies: their unpredictability and instability.

The double-edged sword of good UX: How Robinhood’s gamification of investing backfired during the market downturn

Companies like Robinhood are breaking rules with gamification in retail and cryptocurrency trade. Gamification is worsening the problem for those struggling with crypto addiction and compulsive day trading.

What we're reading

  • Circle asks US Fed not to step on its toes by launching a digital dollar (CoinDesk)
  • Ripple to invest $100 million for carbon removal in race to zero emissions (Yahoo Finance)
  • At Davos, crypto is no longer on the outside (CoinDesk)
  • Paxos and State Street to deliver reduced costs, T+0 settlement in new pilot (Crowdfund Insider)
  • Shopify expands crypto payment options with Crypto.com pact (CoinDesk)
  • Robinhood to launch Web3 wallet to rival MetaMask and Coinbase (FX Empire)
  • Miami’s mayor backed MiamiCoin — then its price dropped 95% (Quartz)
  • Coinbase backtracks on its hiring plans, citing crypto market turmoil (TechCrunch)
  • Wall Street brokers question FTX futures trading plan (FT)

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