Luna, the sister cryptocurrency of controversial stablecoin TerraUSD, fell to $0. The collapse of the algorithmic stablecoin TerraUSD has raised questions about the future survival of similar crypto assets.
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Algorithmic stablecoins like terraUSD, which collapsed and sent shockwaves through the cryptocurrency market, are unlikely to survive, the co-founder of digital currency tether told CNBC.
Stablecoins are a type of cryptocurrency that is usually linked to a real-world asset. TerraUSD, or UST, is an algorithmic stablecoin that was supposed to be pegged to the US dollar.
While stablecoins like tether and USD Coin are backed by real-world assets like fiat currencies and government bonds to maintain their dollar peg, UST was controlled by an algorithm.
UST lost its dollar peg and that also led to a sell-off for its sister token Luna, which crashed to $0.
The debacle has sparked warnings that algorithmic stablecoins may have no future.
“It’s a shame the money… was lost, but it’s no surprise. It’s an algorithm-backed, stablecoin. So it’s just a bunch of smart people trying to figure out how to peg something to the dollar says Reeve Collins. , the co-founder of digital token company BLOCKv, told CNBC at the World Economic Forum in Davos, Switzerland, last week.
“And a lot of people have been raising their money in the last few months because they realized it wasn’t sustainable. So that crash had kind of a cascade effect. And it’s probably going to be the end of most algo stablecoins.”
Collins is also the co-founder of tether, which is not an algorithmic stablecoin. But Tether’s issuer claims it is backed by cash, US Treasuries and corporate bonds. In the crypto market turmoil last month, Tether also briefly lost its dollar peg before regaining it.
Jeremy Allaire, CEO of Circle, one of the companies behind the issuance of the USDC stablecoin, said he thinks people will continue to work on algorithmic stablecoins.
“I have compared algorithmic stable coins to the Fountain of Youth or the Holy Grail. Others have called it financial alchemy. And so there will continue to be financial alchemists working on the potion to create these things, and to… the sacred grail of an algorithmic digital currency with a stable value, so I fully expect that we will continue to pursue that,” Allaire told CNBC last week.
“What happens to the regulation around it now is another question. Will there be, you know, clear lines drawn about what could interact with the market. What could interact with… the financial system, given the risks involved? embedded,” he added.
The crytpo industry expects stricter regulation on stablecoins, especially after the terraUSD collapse. Bertrand Perez, CEO of the Web3 Foundation and former director of the Facebook-backed Diem stablecoin project, expects regulators to require such cryptocurrencies to be backed by real assets.
“So I expect that once we have clear regulation of stablecoins, the basic rules of regulation would be that you have a clear reserve with a set of strong assets, that you are subject to regular audits of those reserves,” Perez told Previous week to CNBC.
“So you can have an accounting firm that comes by regularly to make sure you have the right reserves, that you also have the right processes and measures in place to deal with bank runs and other, say, negative market conditions, to make sure that your reserve is really safe, not just when all goes well.”
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