Regulators Are Paying Attention to UST

The collapse of terraUSD (UST) is algorithmic stablecoins’ Libra moment.
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Luna collapsed, terraUSD collapsed and this is now going to be a Big Thing. I would go so far as to say that UST’s collapse, as dramatic as it was, will have a legacy similar to Libra’s.

PSA: I’ll be in Davos, Switzerland, covering the World Economic Forum’s annual meeting next week, so next week’s edition will be a recap. Going to be in town? Come say hi.

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Terra firma

The narrative

Regulators and lawmakers are looking at the collapse of terraUSD (UST) as a question of whether esoteric products, such as algorithmic stablecoins, are safe for crypto investors as well as whether there are broader financial stability concerns with them.

Why it matters

The introduction of the Libra stablecoin project led to, years later, multiple regulatory approaches and the certainty that sooner or later, governments will have rules in place for how stablecoins can operate. However, all of these efforts have focused on asset-backed stablecoins, not algorithmic stablecoins. The novel structures here might result in new approaches from regulators. The major difference? Libra never launched, and there haven’t been any asset-backed stablecoin collapses the way there was with UST. That difference may lead to regulators placing a higher priority on this issue.

Breaking it down

In June 2019, social media giant Facebook unveiled its long-awaited cryptocurrency project, Libra. Despite assurances from the company that it was not seeking to take over global payments or create a non-U.S. dollar-based financial system, regulators pushed back strongly against the project.

They were largely successful, too: Libra later rebranded as Diem, scaled back its vision to a fraction of what was originally intended and still ended up selling off its assets and shutting down.

Even though the project never launched, the regulatory impact was massive. Regulators worldwide suddenly saw stablecoins as a huge issue they needed to pay attention to.

The collapse of terraUSD (UST) is algorithmic stablecoins’ Libra moment. Regulators are all of a sudden paying close attention to algo stables generally, and UST and luna in particular.

U.S. Treasury Secretary Janet Yellen brought up Terra independently twice last week during separate Congressional hearings on the Financial Stability Oversight Council (FSOC).

“I think you’ve just illustrated that we just had this last week with Terra, and with tether in illustration of the risks associated with stablecoins, that there can be runs. And we’ve seen this historically with private monies, and we invented a good regulatory framework, I think for dealing with this, [we’re] going to try to solve the depository [framework],” Yellen said.

Moreover, she later made it clear that she isn’t saying UST is exactly like Tether: “it depends on the backing of the stablecoin. Terra is algorithmic and doesn’t really have a backing as such.”

It doesn’t seem that the FSOC, a group of regulators tasked with maintaining the economic stability of the U.S., is going to take a look at this, suggesting they don’t see this as being very significant on a macro scale, though individual regulators may have more pointed concerns.

Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra told Bloomberg this week that the collapse of Terra is showing people that a stablecoin is not “as good as a dollar.”

“Stablecoins are something that all the regulators are looking at. Most stablecoin use right now is really for speculative trading in and out of cryptocurrencies. Many are wondering if it’s one day going to be used for consumer payments, but many think it’s not ready yet,” he said.

Potential regulations will likely focus on how the stablecoins – and other cryptocurrencies – are being used.

Notably, this is one of the first times Chopra has spoken about cryptocurrencies since taking on the role of CFPB director last year.

Lawmakers in the U.S. have also been asking regulators about UST and luna – it’s even come up during confirmation hearings for new regulators.

Meanwhile, rumors abound that South Korea’s parliament may try to bring Terra creator Do Kwon in for a hearing, while law enforcement entities are probing the collapse as a possible Ponzi or other criminal enterprise.

The question remains, just what will regulators actually do? So far there isn’t a clear answer. Everyone seems to agree that algorithmic stablecoins are their own thing, distinct from reserve-backed stablecoins. Fewer individuals seem to have opinions on how that translates into clear regulation or guardrails, however.