Terra could leave a similar regulatory legacy to Facebook’s Libra

A new bill in the US House of Representatives on stablecoins proposed imposing a two-year ban on stablecoins pegged to new algorithms like TerraUSD (UST).

The proposed bill would require the Treasury Department to work with the U.S. Federal Reserve, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, and the Securities and Exchange Commission to conduct research into stablecoins similar to UST. request.

Algorithmic stablecoins are digital assets whose value is held constant by an algorithm. Algorithmic stablecoins are pegged to the value of real-world assets, which are not backed.

The stablecoin bill has been in the works for months and has been delayed multiple times. Treasury Secretary Janet Yellen has repeatedly cited the fall of Terra when calling for further regulation of the crypto space.

The failure of the Terra ecosystem, which began with the depegment of algorithmic stablecoin UST, ultimately wiped out the $40 billion ecosystem. This led to a cryptocurrency epidemic, with the cryptocurrency market losing approximately $1 trillion worth of market value in a matter of weeks.

Markets have yet to recover from the contagion and Terra’s collapse has arguably overshadowed the future of algorithmic stablecoins, with certain policymakers who have used it to advocate tougher policies for cryptocurrencies. The latest draft to temporarily ban such stablecoins is one example. Under the current draft of the bill, it is illegal to issue or create new “endogenously collateralized stablecoins.”

The draft evoked mixed emotions from Crypto Twitter.Some market observers called It was a good idea and would help avoid further collapse, but others believed the Terra debacle set the industry back for years. So while algorithmic stablecoins may not be to blame, the execution by the Terra team casts a shadow over the entire algorithmic stablecoin industry.

In many ways, Do Kwon has set the crypto space back a few years. Most of his Terra fans don’t even realize that the “decentralized maxi” craze was pure his LARP. Terra is one of the most centralized L1 him, with the main backing of the UST ($3 billion in BTC) kept in his one wallet without oversight. https://t.co/MJ2c7U1kgJ

— Fat Man (@FatManTerra) September 21, 2022

Regarding the impact of Terra’s contagion on stablecoin regulation, Muriganka Patnaik, CEO of risk monitoring service provider Merkle Science, told Cointelegraph that regulators are more likely than temporary bans. “We need to take a broader approach,” he said. She believes that lumping all algorithmic stablecoins together and banning them blanketly stifles innovation.

“In light of Terra’s demise and the ripple effect it has created, algorithmic stablecoins must regain the trust of both regulators and consumers. and issued a white paper submission that sets standards for transparency and highlights how a particular stablecoin is offered, its operational structure, mint and burn mechanisms, and the types of algorithms it uses to maintain value. We will analyze the inherent risks posed by the offering and whether it could have potential ramifications for broader financial stability.”

It is important to understand that even within algorithmic stablecoins, there are finer-grained classifications such as rebase, seigniorage, and fractional algorithmic stablecoins. Another area to consider here is the fact that algorithmic stablecoins are inherently decentralized. Therefore, banning them becomes more difficult.

Patnaik added that it would be counterproductive to cling to the idea that decentralization and regulatory control would never coincide. The most proactive thing stablecoin issuers can do is “get together and propose technical solutions to the regulatory issues surrounding algorithmic stablecoins.”

Jay Fraser, Director of Strategic Partnerships at Boston Security Token Exchange, said Do Quong’s actions and marketing tactics were responsible for the algorithm’s subsequent poor reputation for the stablecoin, Cointelegraph reported. told to

“There is the question of how Dokwon marketed Terra and how it spent user funds during and after the collapse. It would have included a clearer message about the risks involved in investing money in untested technology that many investors probably weren’t aware of.”

He said the Terra debacle set a precedent for fellow decentralized finance and cryptocurrency investors to be more transparent, “to ensure that consumers and investors are not affected by bad practices.” regulations will be introduced,” he added.

The “Libra Moment” for Algorithmic Stablecoins

Terra’s stablecoin project is somewhat reminiscent of the fate of Facebook’s current Meta stablecoin project, Libra (later called Diem). When the social media giant announced plans to launch its Universal His stablecoin in 2019, adoption would be fueled by Facebook’s suite of social his messaging apps and services, including Instagram and Whatsapp. , got involved in the crypto space.

The stablecoin will be pegged to the value of a basket of fiat currencies including the US dollar, British pound, euro, Japanese yen, Singapore dollar, and a number of short-term assets commonly considered cash equivalents. was

Facebook registered the project in Switzerland, hoping to avoid regulatory oversight from multiple countries, but it didn’t work out. Facebook has faced immediate backlash from regulators around the world, and its founder, Mark Zukerberg, has even faced multiple congressional hearings on the same. The name change to Diem didn’t help its purpose much, and the project eventually closed he by the end of January 2022.

Like the ill-fated Diem/Libra venture, the collapse of Terra’s $40 billion ecosystem has forced regulators to show interest in this nascent industry and forced several more regulatory changes. .

Just as Libra forced regulators to wake up to the reality of private companies issuing money in the digital age, Terra will force Congress to take a closer look at who can issue stablecoins, allowing banks and other financial institutions to has opened the door for early-stage involvement. crypto market.

Dion Guillaume, head of global communications at crypto exchange platform Gate.io, told Cointelegraph that Terra is a stress test that could benefit the industry.

“For sure, it was a huge stress test. But I think this will work out in the end. In addition, projects need to know how to prioritize long-term goals over short-term pleasures.For example, many analysts believe that Terra points out the flaws of the UST stablecoin, making it impossible to create a capital efficient decentralized stablecoin, but users continue to use Terra and projects continue to build on it. Let’s hope the industry learns from this setback.”

Fireblocks’ chief legal and compliance officer, Jason P. Allegrante, said much like Diem did to regulators that Terra’s failure prevented Congress from drafting a promising bipartisan bill. I explained that it was accelerated. He told Cointelegraph:

“In hindsight, we can see that Congress accelerated the drafting of a very promising bipartisan bill, introduced the Stablecoin Act, and significantly normalized the industry in the process. Not only is it a direct reaction to, but the impact is transformative, the regulatory classification of stablecoins, what quantity and quality they must be secured, and how other assets I will clarify whether I can support it.”

He believes that the experience from Terra’s implosion will unlock true stablecoin product innovation, ultimately “spurring more organizations and individuals to invest in cryptocurrencies and related technologies in the years to come.” added.

Terra’s collapse may have led to a cryptocurrency epidemic, but it has brought watersheds to the stablecoin industry. Policy makers need to find better ways to protect consumers with a broader perspective. It has also sparked interest among policy makers in the unique and complex nature of the industry, and made them realize that industry-wide policies do not work.