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    Crypto

    After Terra’s fall to Earth, get ready for the stablecoin era

    SimplefxonlineBy No Comments7 Mins Read

    Stablecoins is supposed to be a boring uncle in the crypto world – safe, discreet and dull. They probably don’t Satoshi Nakamoto have in mind, but they’re supposed to be a calm reassuring haven and a means away from the turbulence of pure-play cryptocurrencies.

    With values ​​set for fiat currencies, stablecoin is intended to be useful rather than offering a quick-fix scheme. They play an important role in the cryptocurrency ecosystem by providing a safer place to store capital without having to cash it all, and allowing assets to be denominated in fiat currencies rather than volatile tokens.

    However, events in May show that the stability of crypto is still elusive. With the government slow to respond, the LUNA Terra token – which has now been renamed Luna Classic (LUNC) – dropped to close to zero in value, eliminating $ 60 billion down the road. The obvious conclusion is that the stablecoin experiment has failed. But I believe that Terra falls to Earth as a precursor to a new era where stablecoins will be an established, accepted and useful component of the global economic system. And the regulation that is just now down has seen through the sale date.

    Not all stablecoins are born equal

    If that seems impossible now, the failure of some stablecoin doesn’t eliminate the whole concept. Other Stablecoin is built on solid ground and performs as desired.

    What happened was a clearout of stablecoins algorithm. These are coins that are unsuitable for the purpose because they are built on an unsafe foundation. There are always critics: Some called out Terra as a Ponzi scheme and argued that, and other algorithms, it would only hold value if more and more people bought them.

    The Stablecoin algorithm is not regulated and is not backed by the same amount as the underlying fiat currency – or whatever, for that matter. Instead, they put in place smart contracts to make or break the supply of tokens available to set the price. It’s a system that works, backed up by an artificially high interest-paying mechanism called Anchor, when enough people believe in it. After that confidence began to evaporate in early May, flood gates opened on the old classic bank.

    related: What can another algorithmic stablecoin learn from the Terra crash?

    But there are other classes of stablecoin that are backed by assets, including fiat currencies. Tether (USDT), the world’s largest stablecoin by market capitalization, has published register an asset to demonstrate that the token is fully supported by the asset held in reserve. Tether’s value against the dollar remained consistent, including through the current turmoil, with only a small blip on May 12 when it declined to $ 0.97.

    CEO Circle Jeremy Allaire wrote on her Twitter account that USD Coin (USDC), the second largest stablecoin by value, backed by different assets.

    USDC has done better than Tether on its main task: tracking the U.S. dollar.

    Regulators slowly responded…

    Regulators increased their focus on stablecoins before the Terra meltdown, though perhaps a little late, given what had happened. In the United States, President Joe Biden signed on Executive Order to Ensure Responsible Digital Asset Development March 9 – for an unexpected chorus approval from the broader crypto industry.

    related: Powers On… Biden embraces blockchain technology, understands its benefits and encourages adoption

    In early April, England announced an intention to organize unspecified stablecoin. That same month, a key member of the U.S. Senate Banking Committee, Senator Patrick Toomey, introduced the “Stablecoin Transparency of Reserves and Uniform Secure Transactions Act of 2022,” called the Stablecoin TRUST Act for short, addressing cryptocurrencies whose value is pegged to the U.S. Dollar or other assets.

    Ironically, in an interview with the Financial Times published on May 6, when Terra began to decline to zero, Senator Toomey called on regulators to do more to regulate stablecoin “before something bad happens.” However, even he did not seem to have predicted how soon it would happen:

    “He backed off against some of the more stringent measures proposed by Democrats, who believe that stablecoin is now too expensive for operators to be regulated like banks.”

    Since then, it has started to move faster. Once the Terra route began, beginning on May 5, regulators rapidly increased the level of vigilance. In a report published May 9, The US Federal Reserve said stablecoins were “vulnerable to open” and less transparent about assets. And Treasury Secretary Janet Yellen recently commented on the need for important guardrails, saying it would be “very appropriate” for lawmakers to enact legislation as soon as this year.

    related: The United States drew attention to the regulation of stablecoin

    Elsewhere, in June, Japan became one of the first countries – and became the largest economy – to regulate non -fiat forms of digital money during parliamentary term. approve the regulation of stablecoin linked if. This is not Terra-collapse, but is based on a regime first proposed by Japan’s Financial Services Agency in March 2021. The new law guarantees face value redemption, limits the creation of stablecoin to regulated institutions, and requires more Anti-Money Laundering measures. tight.

    … and there is no point

    Despite these dangers and emerging policy measures, what appears to be non-existent is a clear distinction between algorithm-supported stablecoin and assets. In my opinion, asset -backed fiat stablecoin should be regulated by the government and have capital adequacy rules and limits on what can be done with reserves.

    Algo stablecoins, if they survive as a class, should come with extensive health warnings about the risks that remain on the shoulders of consumers. Algos is the latest in a long line of innovation – the next one won’t be long, and regulators may not be ready. The fact is that people have to take care of their own assets and wealth. Any fully decentralized environment will inevitably require people to protect their own assets closely and vigilantly.

    And adding to the understanding that the reality is beyond the ability of regulators to maintain, the existence of fully supported coins, such as the USDC, seems to not require the U.S. government to develop its own central bank digital currency, or so -called some “digital dollar.”

    related: U.S. central bank digital currency commentators are divided on profits, united in confusion

    Darkest before dawn

    At the time of writing, we just a few weeks ago collapsed Terra. As a result, stablecoin is under the cloud, and the long -term impact on the broader blockchain token ecosystem, which has remained under pressure since its peak price in September 2021, remains unclear.

    Many commentators are fond of the crypto grim, causing the latent skepticism many people feel about all the crypto projects launched by Satoshi Nakamoto.

    In my opinion, regarding stablecoin, this is the “darkest case before dawn.” Most people don’t – and still don’t – know that all stablecoins aren’t born equal. Stablecoin algorithm, as it is now clear, there is a disaster waiting to happen. Fully supported Stablecoin – ideally in a planned or adopted regulatory environment in the U.S., UK and Japan, etc. – is a wise choice with an important role to play in a hybrid crypto -fiat economy in the future. The time has come.