Stablecoin Crash Proves Better Regulations Are Needed to Protect Consumers

Some cryptocurrencies have always been quite volatile, with their values ​​skyrocketing or plummeting within a short period of time. Therefore, for more prudent investors, “stablecoins” were considered a reasonable place. As the name suggests, it is designed for more reliable and secure betting.

However, at present, its stability is found to be difficult to find. The value of one of the most popular stablecoins, Terra (also known as UST), has fluctuated significantly over the past few days before dropping dramatically. still recover.

Prior to the crash, Terra was the top 10 crypto asset with a valuation of over $18.7 billion. At the time of writing this is 7 billion dollars.

Investors social media I mourn this development. Some talked about lost life savings and the devastating effects of a currency collapse.

And they are right to worry. The impact of volatility in the stablecoin sector should not be underestimated and can destabilize the entire sector.

In theory, stablecoins provide the trading advantages of more traditional crypto assets (like Bitcoin), but should provide a predictably stable value.

Many stablecoins are backed by other assets (usually U.S. dollars) or commodities (often gold), and the stablecoin provider purchases and holds an equivalent amount of the chosen asset to ensure that the coin remains stable. So, while the value of the underlying asset may increase or decrease, the value of the stablecoin must at least maintain a proportion consistent with that underlying it.

However, “algorithmic stablecoins” like Terra work differently. Terra does not hold any reserve assets or commodities, but instead maintains value using algorithms designed to balance stablecoins and partner coins (more traditional cryptocurrencies).

In this case, Terra is tied to a partner coin called Luna, and Luna’s value plummets. its worth now Less than US$0.06 It traded for around US$82.00 just 7 days ago. With both Terra and Luna depreciating rapidly, the algorithm cannot solve the problem of declining trust in the currency pair and the stabilization function does not work.

As a result, fears start and more people sell, like traditional bank runs, which result in massive withdrawals and sharp depreciation. Asset-backed stablecoins tend to avoid them due to the long-term stable value of pegs that build consumer confidence.

But they also have problems. Tether, a coin pegged to the US dollar road crash In the question of whether the company that issued the coin holds it claim to have. And recently Tether depreciation.

save savings

All of this undermines the basic premise of this coin: that it will remain stable. Clients can protect the volatility of traditional crypto markets until they rise again, or use a more traditional account (like a regular bank account) and choose the speed, cost, and ease of international transactions.

However, investors with funds in Terra saw their savings cut in half. The fact that it hasn’t been stabilized yet doesn’t do much to alleviate worries. Simply put, the possibility of a cryptocurrency crisis is very real.

This is why the approach of governments around the world needs to change. Although much has been said about regulation in england And United States of AmericaThere are few meaningful actions.

If they do not act, it will be difficult to advocate for their use. stablecoin It should be avoided if it continues to expose consumers to high volatility and risk.

It seems that the era of innovating the freedom of the field is over. Regulation is essential if the potential of stablecoins is to be realized. It is to provide consumer protection and to prohibit overly risky practices. its potential a lot of feeling It can revolutionize the global economy, speeding up transactions, reducing costs and increasing transparency.

But providing this sector with opportunities to innovate shouldn’t sacrifice people’s savings. If withdrawals continue, they test the stability of a particular stablecoin and, more broadly, whether there is a future for the sector as a whole. As long as they struggle, stablecoins are bad news. However, more than one can be fatal to customer trust.

article author Matthew Silitolaw instructor, Liverpool University

This article is conversation Under Creative Commons License. read original article.

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