Independent Banker - November 2022 - 58

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Are stablecoins
actually stable?
What is
cryptocurrency?
A cryptocurrency is a digital or
virtual currency that is secured by
cryptography, which makes it nearly
impossible to counterfeit or doublespend.
Cryptocurrencies are generally
not issued by any central authority,
rendering them theoretically
immune to government interference
or manipulation.
" While bitcoin is the largest
cryptocurrency by market
capitalization, it's important to
remember that today there are more
than 20,000 different cryptoassets
trading around the world across more
than 500 different exchanges, with
a global market cap of more than
$1 trillion, " Quaranta says. Within
these assets there are different types
of tokens, including tokens engaged
in decentralized finance, or DeFi,
and NFTs (see sidebar, page 61).
(DeFi uses blockchain technology to
enable financial transactions, such as
peer-to-peer payments, without an
intermediary, such as banks.)
The collapse of TerraUSD
(UST) in June, once the third
largest stablecoin, roiled the
cryptocurrency world, says
Brian Laverdure, ICBA's vice
president of payments and
technology policy.
Stablecoins are used to acquire
other cryptoassets through
crypto exchanges; in fact, nearly
all digital asset trading involves
a stablecoin, Laverdure says.
As recently as the beginning
of May, the stablecoin market
reached more than $180 billion
in circulation. Those stablecoins
supported the entire crypto
ecosystem, which was valued at
approximately $1.75 trillion.
In April, acting comptroller
of the currency Michael Hsu
described this relationship
as " an upside-down pyramid,
with $2 trillion worth of crypto
resting on roughly $180 billion
of stablecoins. "
" Hsu cautioned that problems
with stablecoins could destabilize
the larger crypto economy
and create 'outsized losses
for ordinary people owning
crypto ... potentially leading
to a host of other knock-on
effects,' " Laverdure says. " [His]
predictions soon proved to be
true when users of TerraUSD
lost faith in the stablecoin and its
network, which contributed to a
significant decline in the overall
crypto market. "
On May 7, an unknown user traded
$85 million in UST for another
stablecoin, USD Coin (USDC), on
cryptocurrency exchange Curve Finance,
he says. This swap was enough to
overwhelm the mechanisms designed to
maintain stability in the system and led
to UST losing its peg with the dollar. This
precipitated a run, because, importantly,
there is no insurance to protect
consumers if a crypto entity fails.
" In a matter of hours, UST experienced
a precipitous decline in its value as
others rushed to remove their assets
from Curve, plunging from $1 to 76
cents, " Laverdure says. " The descent has
deepened, and TerraUSD is now valued at
mere pennies. "
The Terra sell-off quickly spread to
other stablecoins. USDX, with a market
cap of nearly $200 million prior to the
crash, failed because it had UST as part of
its collateral reserves, he says. So, when
the value of UST toppled, so too did the
value of USDX (not to be confused with
the other USDX, the U.S. Dollar Index).
" As the dust from TerraUSD's
collapse settles and the industry takes
stock of the causes, policymakers and
market stakeholders are focused on
what the failure means for the future
of stablecoins, " Laverdure says. " In
the immediate future, the total supply
of stablecoins will likely be somewhat
limited due to decreased crypto trading. "
58 Q ICBA Independent Banker Q November 2022
Independent Banker - November 2022

Table of Contents for the Digital Edition of Independent Banker - November 2022
