Stablecoins Are Here to Stay – And Regulators Must Get On Board

Stablecoins Are Here to Stay – And Regulators Must Get On Board

The recent collapse of the TerraUSD algorithmic stablecoin has put the popular crypto asset in the spotlight. And its repercussions are only just starting to be felt, from talk of government regulation from US Treasury Secretary Janet Yellen, to Tether temporarily losing its USDT 1:1 peg to the dollar, to an all-time low of US$0.95, and with investors withdrawing more than US$10 billion in the past two weeks.

Kathleen Breitman, a co-creator of the Tezos blockchain, speaking to CNBC on the topic said: “As much as I relish seeing things that don’t make sense fail, there’s always a tinge of like, ‘Are people going to extrapolate from this that everything that’s a stablecoin is unsound?’”

At the same time, a statement from the G7 on May 20 warned that “no global stablecoin project should begin operation until it adequately addresses relevant legal, regulatory and oversight requirements through appropriate design and by adhering to applicable standards.”

Despite recent events stablecoins remain a necessary and popular part of the crypto ecosystem.

Despite recent events stablecoins remain a necessary and popular part of the crypto ecosystem. In a October 2021 report from DBS – Singapore’s largest bank – recognized that “Stablecoins have gained momentum” while also noting concerns about stablecoins to withstand high volatility. In fact, Singapore is no stranger to stablecoin innovation, with the launch of the XSGD pegged to the Singaporean dollar in 2020 by StraitsX, with a market cap of almost US$200 million and records over US$1 million in traded volume on a daily basis it’s the world’s largest non-USD fiat-backed stablecoin. I’m also impressed by the Jarvis Network, which has its own set of stablecoins collateralized with USDC, including SGD in late 2021.

These innovations support Singapore’s leading role as a regional crypto hub, with government and startups working in partnership.

Even after the Terra crash, stablecoins still have a total market cap of over US$160 billion, according to CoinMarketCap, with market leader Tether currently worth around US$73 billion, having surged from just US$4.1 billion at the start of 2020.

That said, Tether has not escaped the current slump unscathed, having lost US$11 billion in vale since its US$84.2 billion on May 11. In a statement on Monday May 23 Tether sounded an understanding note, welcome in the current situation, acknowledging that following its loss of peg that “it’s natural that investors might have questions about what stops USDT from facing a similar fate.” But confirmed it had US$70 billion of collateral. I agree the strength of Tether, compared to most traditional banks, has been its ability to process withdrawal of 10% of its assets in a few days.

Check the fine print

Despite these “collateralized assurances,” the data shows crypto whales leaving Tether for USDC. Not surprisingly these whales regard USDC, as the safer option, bearing in mind USDC reports its assets monthly. However, those same whales might want to check the small print.

Circle claims that each USDC is backed by a reserve dollar, and other “approved investments”, these are not detailed. Indeed, the wording on the Circle website changed from the “backed by US dollars” to “backed by fully reserved assets” by June 2021. The third most popular stablecoin, BUSD, created in 2019 as a collaboration with Binance and Paxos, which grew in market cap of around US$1B at the start of 2021, to over US$14.6 billion at the end of 2021, and is now up to over US$18 billion is I believe another winner from the Terra crash, due in large part due to the security involved with the token. As both regulated by the New York State Department of Financial Services, and publicly audited very month, its likely to benefit from the demand for secure stablecoins going forward.

I’m also heartened by the positive post-Brexit approach to stablecoins from the UK government, which clearly recognizes that stablecoins are here to stay, and we need all governments and regulators to get behind that fact.

As an industry we also need to recognise that algorithmic stablecoins are a “different kettle of fish.”

But as an industry we also need to recognise that algorithmic stablecoins are a “different kettle of fish.” I concur with Chris Burniske’s assessment that while it’s unwise to think they’ll never be a workable algorithmic stablecoin, if such an asset needs to either go up or stay stable to work, then it’s not going to survive the crypto market.

Let’s also not forget in the push to get mainstream adoption of crypto that that also raises the risk of contagion to the wider economy. The problem is if the folks who got hit hardest, the retail investors, who bet on LunaUSD because they were told it was “safe”, decide to pull back from other assets.

That said, a balance needs to be struck in terms of protecting investors, the risk in investing in altcoins is different from that with stablecoins. I’m in agreement that regulation needs to happen, but a balance needs to be struck, in protecting investors, and which also allows for rapid innovation which is key to the success of the crypto industry.

 

Original Source: https://blockhead.co/2022/05/29/stablecoins-are-here-to-stay-and-regulators-must-get-on-board/

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

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After Terra, Luna crashes, regulators count cost of crypto

After Terra, Luna crashes, regulators count cost of crypto

Spectacular collapse of stablecoin puts focus on regulatory frameworks in South Korea and Singapore.

Taipei, Taiwan – As the crypto winter deepened this month, one wealth-destroying event – the collapse of the TerraUSD (UST) and Luna coins – has brought the human cost of unstable cryptocurrency projects to the surface.

UST, a so-called “algorithmic stablecoin,” plummeted over the last week as it lost its peg against the US dollar and sent its sistercoin Luna crashing to zero, erasing about $45bn. The crash wiped out the savings of untold numbers of investors overnight.

“I felt my heart sink watching Luna go into that downward spiral,” Hank Kennedy, a factory worker in Chicago, told Al Jazeera. “It (the crash) has had a huge impact on my life.

“Now I’m behind on all my bills, and I’ve lost $40,000, which was everything I had in my savings,” Kennedy added. “I was actually thinking that I would be able to make enough money to pay my home off, but instead, I’ve lost everything.”

The incident epitomises regulators’ nightmare scenario of crypto projects going wrong and prompted US Treasury Secretary Janet Yellen to call for regulation of stablecoins – whose selling point is their supposed stability due to being pegged to another currency or commodity – by year’s end. Former lawyers at the Securities and Exchange Commission (SEC) say the agency is probably already investigating the case.

In Asia, regulators may also have impetus to act.

Do Kwon, the creator of the cryptos, is a South Korean national, while Terraform Labs and the Luna Foundation Guard, the organisations that support the digital coins, are both registered in Singapore.

South Korean authorities launched an “emergency investigation” into the case this week. Investors in Singapore have filed police reports, although authorities have yet to make any move.

Kwon wrote on Twitter last week that he was “heartbroken” about the pain his invention had brought investors and that neither he nor the companies associated with the project had sold UST or Luna to profit from the crash. The statements came after the founder earlier that day proposed a “revival plan” to restart the network and distribute ownership of the project via one billion new tokens issued to holders of the collapsed currency. Kwon and the Luna Foundation Guard did not respond to requests for comment before publication.

The crash comes amid a rethink of the city state’s regulatory approach to digital assets as it tries to position itself as a responsible crypto hub. Singapore’s response could set a precedent as the social and economic costs of poorly managed projects come into sharper focus.

Singapore
Singapore is trying to position itself as a responsible crypto hub [File: Ore Huiying/Bloomberg]

“The government of Singapore is not going to be impressed that a firm registered in its country, with no real material ties to the city-state, has caused such damage to investors around the world,” Sam Reynolds, a Taipei-based crypto analyst at CoinDesk, told Al Jazeera.

“This is likely to lead to a further tightening of rules surrounding crypto firms registered in Singapore for jurisdictional preference yet conducting business primarily abroad,” he added.

Singapore’s parliament had already passed a law last month to increase oversight of firms like Luna that are domestically registered crypto companies but mainly operate abroad.

Under its Payments Services Act 2019, entities that offer payment instruments, such as algorithmic stablecoins, require a Digital Payment Token Services (DPTS) licence. Though Singapore has only issued a DPTS licence to a handful of firms, it has granted many more companies temporary exemptions from the law.

Yet when billions went up in smoke up this month, Kwon’s organizations had neither a DPTS licence nor an official exemption, according to Singapore’s Financial Institutions Directory.

Its failure to register is the first of three interrelated factors that lay compelling grounds for legal intervention by the city-state, according to Anndy Lian, a Singaporean crypto thought leader and author of Blockchain Revolution 2030.

“The second (factor) is this was a stablecoin,” Lian said, noting that since it was advertised as having parity with the US dollar and boasted 20 percent yields, it appealed to investors looking to stake their savings over time. This differentiates it from other cryptocurrencies whose price floats freely and are conducive to speculative trading.

“That means many retail investors got hurt on the pretext they had bought into the project because it is a stablecoin,” said Lian.

“From a Singaporean perspective, if you are a retail investor and you feel that you have been a victim of fraud, and have lost a certain amount of dollars on paper even though you held your investment and did not sell … that is a possible lawsuit Singaporeans can pursue or the government can pursue,” he said.

Cooperation with foreign regulators

The third reason is Kwon’s planned “fork” – the closing of the original network and launching a substitute – which has been put forth to revive the currency. Lian said such a move would  “dilute all the shareholders” and redistribute the tokens in a way that is likely to be highly inequitable.

“I think the Singaporean government will surely take some action after the fork is attempted,” he said.

South Korea’s Financial Supervisory Service (FSS) said this week that increased cooperation with foreign authorities is needed to regulate crypto after the Luna crash.

Lian believes Singapore may coordinate with foreign regulators on the case, too.

“Because this is a global event, there might be a common interest for the US and Singapore to work together on this case,” he said.

Lian said any action should not set the wrong precedent by insulating crypto investors from all losses.

“It would be misleading if investors believed they can claim losses from all altcoins. This was different since this was a stablecoin. We need to make that demarcation very clear,” he said.

“I think more regulatory clarity would need to be established before crypto-specific cooperation with countries could happen,” Reynolds said, referring to the continuing lawsuit between Terraform Labs and the SEC that seeks to establish if the financial watchdog has jurisdiction over the project.

Even if the company were found liable, it is unclear whether it has the assets to repay investors.

“The question would be, what assets would Terraform Labs and the Luna Foundation Guard have to repay investors?” Reynolds said.

“The Luna Foundation Guard, with its current balance sheet, could only pay out pennies on the dollar. And aside from those balances, it is unlikely that Terraform Labs has material assets sufficient to pay out any claims against it in a meaningful way,” he added.

“Before this happens, we would also need a determination if the collapse happened because of fraud, negligence, a coordinated attack, or market rejection of the platform. Right now, that’s not clear.”

Do Kwon
Terraform Labs founder Do Kwon is a South Korean national who registered his company in Singapore [File: Woohae Cho/Bloomberg]

Lian said regulators will look for a strong expression of shared grievances to justify moving forward with a case in Singapore.

In recent days, an online community in South Korea named “Victims of Terra-Luna coin” has been formed for this purpose.

Kennedy, the US worker who lost his funds, said he would readily join a class action lawsuit against Kwon.

“(This is) the reason why people like me try to talk with him on Twitter every day … to get some type of answers,” he said.

As regulators mull over their next move, the saga has offered industry players a moment of pause to reflect on what constitutes good governance and sound investing.

“It will take time to get the trust back,” Lian said, adding the case has spooked institutional investors in Singapore.

“I think we need to rethink what decentralisation means. What will happen next with Luna will not be based on any consensus formed among its community.”

Reynolds said investors should do their research and ensure they have diversified their assets.

“On paper, algorithmic stablecoins were a good idea but the industry is coming dangerously close to a ‘2008 moment’ as a result of one project’s outsized ambition,” he said. “The VCs that backed Terra need to have a serious think about how we got to this moment.”

SOURCE: AL JAZEERA

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

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