Stablecoins wiggle their way into the unknown

Tether, USDC, and other valuable pegs to the dollar were lost last week in a wave of market chaos that damaged faith in these coins designed to avoid crypto volatility. Was that a one-off outburst, or are they losing their soul?

According to data provider Coinmarketcap, major stablecoins fluctuated between $0.95 and $1.02 last week, after previously remaining pegged to within a cent in 2022.

It’s not the first time they’ve experienced the wobbles: both Tether and USDC have suffered less reported bouts of volatility in prior years, climbing to as much as $1.01 in 2021 and decreasing to around 97 cents in 2020.

According to Morgan Stanley, last week was the most volatile in the history of this type of Cryptocurrency.

“Stablecoins are the closest thing to a systemically important asset in the crypto sector, and any influence on the value of one or more stablecoins is likely to impact the system as a whole,” said Hagen Rooke, a financial regulation partner at Singapore law firm Reed Smith.

“As of now, stablecoins are relatively minimally regulated, which is strange given how a centralized stablecoin operates is essentially the same as a bank deposit.”

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To increase confidence, stablecoins are tied to the value of mainstream assets such as the dollar, and they are the primary means for transferring funds between cryptocurrencies or into traditional cash.

“The economy is transitioning to an internet-based, always-on model, but the financial system is not. So you need a stablecoin to have dollars that can move at the speed of the economy, or at the speed of the quickest portions of the economy “Chad Cascarilla, CEO of Paxos, a leading stablecoin, stated.

The spectacular fall of TerraUSD, an outlier since its peg to the dollar was supposed to be maintained by a complicated algorithmically driven system rather than by reserves of dollars or other assets, prompted last week’s market turbulence.

According to analysis from crypto exchange Kraken, TerraUSD’s woes contributed to a drop in crypto markets that saw almost $357 billion, or 21.7%, of digital asset market capitalization wiped away week on week.

Even within stablecoins, such turmoil may result in victors and losers.

According to Coinmarketcap, Tether’s market value has dropped to $75.6 billion from $83 billion last Monday, before the dollar decoupling, while USDC’s has risen to $51 billion from $48 billion.

“There’s more confidence in USDC because of institutions like BlackRock that hold USDC reserves for them,” said Marcus Sotiriou, analyst at UK-based digital asset dealer GlobalBlock.

Meanwhile, Rooke and others anticipate further regulation.

“I think we’ll see some policy for stablecoins,” said Michelle Bond, CEO of the Association for Digital Asset Markets.

“There are several questions to consider: what are the allowable reserves? Who has the authority to create a stablecoin? How should an audit of an issuer and the reserves be conducted? What kind of information is provided to consumers?”