This article features some insight from our Partner at MK Fintech Partners Ltd, Dr Justine Scerri Herrera, regarding the current Stablecoin turmoil the crypto world is facing. This is as investors and speculators alike are getting worried about the crypto market and are warning of deeper and more lasting volatility in stablecoins. But are these investors crying wolf, or is this market anguish justified? Dr Scerri Herrera takes a stance from her unparalleled experience and insight into crypto markets.
Stablecoins facilitate most crypto trading volume and power the evolving crypto train DeFi. Stablecoins are key as they allow markets to flourish since they are used to settle crypto derivatives and in times of dampening markets (such as these bearish times).
Which are the Top 5 Stablecoins?
Tether (USDT), USD coin (USDC), Binance USD (BUSD) and Dai (DAI). Also quite notably, we had terraUSD (UST). These are the five largest stablecoins and they represent roughly $160 billion of value. Three of these stablecoins (USDT, USDC, BUSD) are collateralised stablecoins issued by centralised entities.
DAI is different in that it is collateralised and backed by a diversified portfolio of crypto assets. Instead of being issued by a centralised entity, a DAO called MakerDAO manages DAI. DAI is collateralised with crypto rather than dollars, but it is, and this is critical, overcollateralised.
Conversely, USDT is not collateralised at all! It is an algorithmic stablecoin powered by the Terra protocol. Instead, it is backed by a crypto token called LUNA. In short: under stress it lost its peg to the US dollar and caused hyperinflation of luna.
The Problem is NOT Necessarily Algorithmic Stablecoins.
Does this mean that algorithmic stablecoins are flawed? Not necessarily. One bad apple is the exception not the rule. However this shows the importance of collateralisation and better yet over-collateralisation.
Regulators are now further speeding up regulating stablecoins. However, even though the cause of this current issue are algorithmic stablecoins, regulators are only interested in regulating FIAT-backed or asset-backed stablecoins due to the systematic risk on the traditional financial system.
Crypto currencies and Stablecoins are definitely here to stay. The outcome of this is that lessons will be learnt and we will move higher up the learning curve.
More Information on Crypto Assets and Stablecoins - Meet Dr Scerri Herrera in Person!
Dr Justine Scerri Herrera gave a keynote on Stablecoins within the Maltese local community on Wednesday 18th May at 19:00h at Soho office top floor The event was organized by crypto hub malta.
The content of this article is valid as at the date of its first publication. It is intended to provide a general guide to the subject matter and does not constitute legal advice. We recommend that you seek professional advice on your specific matter before acting on any information provided. For further information or advice, please contact infomalta@kyprianou.com or telephone +356 2016 1010.
