TerraUSD (UST-USD), which was the third-largest stablecoin in the cryptocurrency market just a couple weeks ago, has since unpegged from the U.S. dollar and collapsed along with its reserve asset Luna (LUNA1-USD). According to Circle CEO Jeremy Allaire, such a crypto collapse could spur legislators to take quicker action towards regulating the digital asset space.
“When you have a major blowup, it’s certainly going to accelerate the need for Congress to act and establish some perimeters around who and what is involved in operating a dollar stablecoin in the United States of America,” Allaire told Yahoo Finance Live.
Allaire joined Yahoo Finance Live to discuss the collapse of stablecoins like Terra, the cryptocurrency sell-off, crypto regulation, and the outlook for crypto exchanges. Circle is a Boston-based peer-to-peer payments technology company built on blockchain technology and powered by crypto assets.
TerraUSD, which is supposed to maintain a 1:1 peg to the U.S. dollar, is unlike centralized stablecoins in that it is not backed by dollars in a bank account. Instead, a TerraUSD is minted through the burning of $1 worth of Luna. The depegging appears to have been catalyzed by an influx of withdrawals from Anchor, a decentralized finance (DeFi) protocol running on the Terra platform which offers high yields to depositors of UST, on the weekend of May 7-8.
Amid the broader crypto market pullback, as deposits on Anchor fell by several billions, the already depegged TerraUSD stablecoin dropped further and dragged the Luna reserve crypto down as well. The amount of Luna in circulation soared and a sell-off of both coins ensued, sending both crashing towards zero. TerraUSD trades around $0.10 today, and Luna is nearly worthless at a small fraction of a cent.
However, Allaire believes that the high interest rates offered by Anchor to depositors should have been an early indicator that the Terra system was on unstable footing from the start.
“I think what has unfolded with these unstable stablecoins, such as UST, was entirely predictable,” he said. “Our own analysis from a very long time ago suggested that the footing that this was on was really based on subsidizing these yields, which was really driving people to kind of buy this Luna token, create these UST tokens, put them in this 20% interest rate, which was too good to be true.”
In any case, Allaire said, the downfall of Terra has dealt a blow to retail cryptocurrency investors and the industry as a whole.
Treasury Secretary Janet Yellen called for new regulations surrounding crypto last week in the wake of the Terra meltdown.
“I wouldn’t characterize [cryptocurrencies] at this scale as a real threat to financial stability, but they’re growing very rapidly, and they present the same kind of risks that we have known for centuries in connection with bank runs,” Yellen said to lawmakers during the House Financial Services Committee on May 12.
According to Allaire, there are several “very viable legislative proposals” that are on the table for the federal government to reign in the crypto industry. He believes that the level of urgency for regulation has been heightened in light of the recent volatility seen in the market.
“I think standing between broad-based mainstream adoption of crypto infrastructure for commerce and financial applications at a global scale is this regulatory clarity,” he said. “And I think we have the impetus to see that happen now.”
Thomas Hum is a writer at Yahoo Finance. Follow him on Twitter @thomashumTV