Stablecoin panics may be a feature not a bug

3 minute read

Smartphone with Terra logo is placed on displayed U.S. dollars in this illustration taken May 11, 2022. Illustration taken May 11, 2022. REUTERS/Dado Ruvic/Illustration/Files

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LONDON, May 17 (Reuters Breakingviews) - Stablecoins are failing to live up to their name. TerraUSD, one of the many cryptoassets whose value was supposedly pegged to the U.S. dollar, imploded last week. And tokens issued by $80 billion behemoth Tether, also linked to the greenback, briefly traded at 95 cents. Wobbly “safe” assets may be a feature, not a bug, of the cryptocurrency world.

Granted, the two cases are different. Terra, which had $18 billion of digital coins in circulation in early May, utterly failed. Its value relied on trading incentives that became self-destructive read more . Tether, which claims to be backed by real-world financial assets, allowed holders to swap tokens worth $7 billion for cash over six days.

Nonetheless, it’s a reminder that crypto’s safe havens are risky. Traders depend on stablecoins to move and lend money with confidence. Crypto derivatives are often denominated in Tether, which is also often used as collateral. Its collapse would inflict widespread losses. Little surprise regulators in the United States and elsewhere are concerned.

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One fix is for stablecoins to hold $1 in a bank account for every digital token of equivalent value in circulation read more . That would be a major improvement for Tether, which in December had less than half its reserves in bank deposits and U.S. Treasury bonds. The rest was in riskier assets like commercial paper, corporate bonds and digital tokens. Switching to 100% cash would make future wobbles less likely.

It’s doubtful that Tether’s management, including Chief Financial Officer Giancarlo Devasini, would countenance that. Ditching racier assets would mean less income. Assuming Tether earns a conservative 1% yield on its reserves, it pockets $800 million of revenue per year. That would all but vanish if Devasini put the assets in a bank instead.

Nor would that solve regulators’ worries. With minimal interest income, a fully cash-backed stablecoin might have to charge transaction fees to cover its costs, potentially sending users elsewhere. In the crypto world, there’s always a new, unregulated coin offering suspiciously juicy rewards. Terra’s popularity owed much to the 20% interest users hoped to earn through an associated product.

It’s therefore hard to imagine a safe but costly token being the only game in town. Other upstart “stablecoins” could win fans by taking more risk. The upshot is that Terra’s blowup, and Tether’s wobbles, could be a recurring theme.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)


- TerraUSD, a so-called stablecoin that was supposed to be pegged to the U.S. dollar, collapsed within a few days starting on May 9. As of 1345 GMT on May 16, it was trading at $0.11 according to CoinMarketCap.

- Its sister cryptoasset Luna, which was supposed to help maintain the dollar peg, lost virtually all its value over the same period. In early May the two coins had a combined value in circulation of almost $50 billion.

- The world’s largest stablecoin Tether, which is also pegged to the dollar, fell to roughly 95 cents on May 12. It has since recovered and was trading at 99.89 cents as of 1345 GMT on May 16.

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Editing by Peter Thal Larsen, Streisand Neto and Oliver Taslic

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