CNBC reported that TerraUSD or UST, an algorithmic stablecoin, did not withstand stress tests. The stablecoin was supposed to be backed by the US dollar but it lost its peg. As a result, UST collapsed and sent shockwaves through the cryptocurrency market. Reeve Collins, a co-founder of BLOCKv and a co-founder of Tether stablecoin, said that the Terra USD debacle severely hit other altcoins that can “probably be the end” of so-called algorithmic stablecoins. According to analysts, stablecoins may become subject to banking regulations to reduce risks in the industry. Unlike Tether and USD Coin, which are backed by fiat currencies and government bonds to maintain their dollar peg, Terra USD is governed by an algorithm and this does not allow it to be backed by USD. Terra USD caused a collapse in the cryptocurrency market when it lost its dollar peg. This led to a sell-off for its sister token luna, which crashed to $0. “It’s an algorithmic-backed, stablecoin. So it’s just a bunch of smart people trying to figure out how to peg something to the dollar. So that crash kind of had a cascade effect. And it will probably be the end of most algorithmic stablecoins,” Reeve Collins said. Regulation of cryptocurrencies will be necessary when dealing with them, economists state. However, most regulators should scrutinize the issue. The recent collapse of Terra USD and Luna has raised concerns among governments and central banks. Regulators intend to take stablecoins under control to keep the cryptocurrency market stable. US Senate Banking Committee Ranking Member Pat Toomey released draft rules on regulating stablecoins. Earlier, US Treasury Secretary Janet Yellen insisted on passing legislation around stablecoins. In addition, the UK government announced plans to regulate stablecoins. Bertrand Perez, a former director of the Diem stablecoin project, expects regulators to demand that such cryptocurrencies should be backed by real assets.
