Crash of ‘safe’ stable coins triggers meltdown in cryptomarkets
CRYPTOCURRENCY owners are rushing to withdraw their funds amid a historic market panic that has been likened to a run on banks.
The value of so-called “stablecoins”, cryptocurrencies whose values are meant to be pegged to real-world currencies such as the dollar, have slumped as owners lose confidence in them.
Terra, whose value is meant to be propped up by software, has fallen from $1 (£0.8) on Monday to about 50 cents, while Tether, the best-known stablecoin, fell as low as 95 cents on Wednesday, the first time in years it has lost its “peg” to the dollar. Luna, a non-stablecoin cryptocurrency that is designed to support the value of Terra, has fallen by 96pc in the last 24 hours.
The crash has raised concerns about the concept of stablecoins, which are designed to be a safe haven for cryptocurrency owners against the whipsawing price of digital assets such as Bitcoin.
The panic has spread into more established cryptocurrencies. Bitcoin fell 10pc in 24 hours to under $27,000, an 18-month low, while Ethereum saw a similar drop.
Almost $200bn has been knocked off the value of all the cryptocurrencies in circulation in the last day, according to Coinmarketcap, which tracks prices.
Binance, the world’s biggest cryptocurrency exchange, suspended withdrawals of certain currencies.
The Financial Conduct Authority has warned that cryptocurrencies carry no legal protections. It said: “There are no consumer protections for those who buy any cryptoassets and NFTS, and they are not FSCS [Financial Services Compensation Scheme] protected. As a result, if you buy cryptoassets you should be prepared to lose all the money you invest.”
Janet Yellen, the US Treasury Secretary, said this week that the collapse of Terra showed the need for regulation.
In Britain, ministers have outlined plans to legislate to allow the use of stablecoins as a form of payment. The Treasury said yesterday it would apply strict standards to such coins. A spokesman said: “The Government has been clear that certain stablecoins are not suitable for payment purposes as they share characteristics with unbacked cryptoassets. We will continue to monitor the wider cryptoasset market and stand ready to take further regulatory action if required.”
Terra, also known as UST, is designed to be “pegged” to the dollar with owners always able convert one coin for a dollar’s worth of Luna. However, during a major sell-off, the mechanism by which UST’S value is algorithmically maintained is unable to keep up with the rush of people attempting to withdraw cash.
Market watchers have suggested Terra’s sell-off has been caused by a financial attack designed to force its operator to sell its Bitcoin reserves in a move likened to Black Wednesday in 1992, when the UK government failed to prop up the value of the pound amid a selling attack from investors including George Soros.
The market chaos came as Softbank’s Vision Fund, the world’s biggest technology investor, reported a historic $26.2bn (£21.3bn) loss in the first quarter amid a brutal tech sell-off.