TerraUSD(UST) is a so-called stablecoin with a 1-to-1 peg to the U.S. dollar. However, the stablecoin dropped significantly and deviated from its beg. Terra Luna (LUNA) plunged and lost tens of billions in a matter of days. After this action, government officials have been speaking out about the crash of TerraUSD and Terra Luna. This has major implications for the cryptocurrency and blockchain industry, and it may cause a major shift in regulatory clarity.
The Crash of Terra (LUNA) & TerraUSD
UTS is an algorithmic stablecoin. It mints and burns tokens to regulate supply and price. Under pressure from a sell-off in cryptocurrencies, the price of UST has plunged in recent weeks, causing panic in the market. UST has since grown to become a major player in the crypto market, with 16 billion tokens in circulation. The crash of the stablecoin sparked a lot of action on the regulatory side of cryptocurrencies.
Yellen’s Comments on TerraUSD & The Push for Regulations
Janet Yellen, U.S. Treasury Secretary, has spoken out about the need for regulations around stablecoins, a class of cryptocurrencies with stability features, emphasizing the need for speed.
During her testimony before the Senate Banking, Housing and Urban Affairs Committee, Yellen stated:
“A stablecoin known as TerraUSD experienced a run and had declined in value.”
“I think that simply illustrates that this is a rapidly growing product and that there are risks to financial stability and we need a framework that’s appropriate.”
Yellen emphasized that the current regulatory framework doesn’t have consistent and comprehensive standards in regards to risks with stablecoins.
The Federal Reserve has warned that stablecoins are vulnerable to runs. They are also warning that using stablecoins to meet margin requirements for leveraged cryptocurrency trades can increase the risk of redemptions.
The SEC has also raised issued with stablecoins and other digital assets that are pegged to the U.S. dollar or other fiat currencies.
SEC’s Gensler on Stablecoins
In an interview with Bloomberg News, Gensler mentioned USD Coin, Tether (USDT) and Binance USD are affiliated with cryptocurrency exchanges.
Gensler stated:
“I don’t think that’s a coincidence… Each one of the three big ones were founded by the trading platforms to facilitate trading on those platforms and potentially avoid AML and KYC.”
Gensler added:
“Crypto’s got a lot of those challenges– of platforms trading ahead of their customers… In fact, they’re trading against their customers often because they’re market-marking against their customers.”
What The Crash of Terra (LUNA) and TerraUSD Means For Cryptocurrency Regulations
There are concerns around stablecoins after TerraUSD, or UST, lost its peg to the dollar over the weekend. UST is an algorithmic stablecoin, which means it’s not backed by cash or cash equivalents, but rather through trading and treasury management. With this major collapse, many are trying to pick up the pieces.
The crashes of LUNA and TerraUSD could spark a slew of regulations, which can help to protect retail traders and investors. It’s wait-and-see mode still, but we’ll continue to provide cryptocurrency regulatory news when they arise.
