IMF: Algorithmic collapse of stablecoin may bring down Crypto markets again
The Director of Foreign Exchange and Capital Markets of the International Monetary Fund (IMF) warned of further failures of stablecoins. In particular, Director Tobias Adrian highlighted the risks of so-called algorithmic stable coins, stating that "there are other coins that may fail."
Algorithms do not provide real financial support. In the end, for each stable coin there should be a reserve in the amount of $ 1, which can be repaid so that the issuer does not face a situation related to the bankruptcy of the bank. Many algorithmic stablecoins failed when the public lost confidence and demanded to cash them out, including TerraUSD, IRON, Basi sCash, SafeCoin, bitUSD, CK USD, DigitalDollar and NuBits.
Algorithmic stablecoins rely on assets in various wallets, smart contracts, and liquidity pools to protect the $1 peg. TerraUSD (UST) became an example of the failure of algorithmic stablecoins when it collapsed in May, despite the promises of the ecosystem, once worth $29 billion, to keep the price at $1. UST's owners quickly lost $14 billion in capitalization by market value, as well as untold billions from DeFi and other contracts tied to UST's price when it was sold to $0.
IRON, another algorithmic stablecoin similar to UST and promoted by Mark Cuban, suffered the same fate. Titan Finance said it backed IRON with its own token plus USDC Circle, but its peg to $1 eventually failed in June 2021 and IRON collapsed to $0.
Algorithmic stablecoins have Not Outgrown traditional stablecoins
Traditional stable coins are backed by assets held by a central custodian, not something that an algorithm can access. Proponents of collateral stablecoins, such as Paxos, Circle or Tether, usually promise that customers can redeem their one stablecoin for $1 at the corporate level.
Because of this promise, these stable coins usually trade in the range of cents from $1. Examples of non-algorithmic asset-backed stablecoins are Tether (USDT), Binance USD (BUSD), Pax Dollar (USDP) and USD Coin (USDC).
These stable coins carry the risk that their managers are lying or that they will suspend the buyback, making them similarly vulnerable to the panic associated with fleeing the bank. For example, critics of Tether accuse it of failing to maintain sufficient reserves or conduct financial audits. Tether has severed ties with its first auditor, Friedman LLP, accusing the company of "excruciatingly detailed procedures."
Indeed, although algorithmic stablecoins suffer from problems, traditional stablecoins also pose significant risks for investors. IMF Director Adrian warned that fiat-backed stablecoins may fail because they may not be backed by cash in a 1:1 ratio.
For example, between February 19, 2019 and March 4, 2019, Tether edited its statement that it supports USDT exclusively in cash. He erased that promise and replaced it with a new commitment to support USDT with a basket of assets, including commercial paper. Currently, its latest version of this ever-changing promise is to support USDT with various assets such as gold, commodities, collateralized debentures, bonds and collateralized loans.
The lack of centralized entities governing decentralized finance challenges effective regulation and supervision. Regulation should focus on the elements of the crypto ecosystem that enable it, such as stablecoin issuers and centralized exchanges. #GFSR https://t.co/QROWm2yjVG pic.twitter.com/0NTH8eEUbH
- IMF (@IMFNews) April 13, 2022
The IMF continues to Repeat calls for regulation of cryptocurrencies
Another recent IMF report echoed Tobias Adrian's call for regulation. However, he did not sound the alarm, noting that the cryptocurrency industry currently does not pose a risk of infection for the economy as a whole.
According to his report, the effects of the bear market of cryptocurrencies this year mainly affected digital assets, businesses and hedge funds. The report mentions a slowdown in growth rates in advanced economies, but the impact of digital assets is greatly devalued.
Thus, the collapse of the UST ecosystem worth several tens of billions of dollars has become an unmistakable call to action on the part of regulators. The IMF wants better regulation of stablecoins, focused on protecting investors. The IMF director acknowledged that the regulation of more than 40,000 coins listed on CoinMarketCap is a problem. Nevertheless, he advised as a first step to regulate entry points, such as issuers of stablecoins and owners of exchanges.
Author: Dan, analyst Сoin-signal.com Club
https://coin-signal.com/cryptonews/imf-algorithmic-collapse-of-stablecoin-may-bring-down-crypto-markets-again/
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