The fall of Terra’s UST has triggered heated debate over the future of stablecoins, as well as a significant drop in crypto market sentiment. UST de-pegged from the dollar earlier this week and has fought to reclaim its 1:1 peg since then. The Luna Foundation Guard and founder Do Kwon’s corrective initiatives have done nothing to reverse the company’s losses.
Tether (USDT), the world’s most popular stablecoin, is also under selling pressure, trading more than 4% below its $1 peg. This flaw has sparked concern that governments may use it as an example to impose more stringent controls on the bitcoin sector.
Will the Government Ban Stablecoins?
Following the latest meltdown, the Securities and Exchange Commission (SEC) in the United States may put more limits on stablecoin supply. Investor protection is a recurrent concern among countries lobbying for additional crypto legislation. Terra may have a point after wiping away billions of dollars in investor funds in a matter of days.
Prominent crypto lawyer John Deaton said SEC Chair Gary Gensler, and Senator Elizabeth Warren- both vocal crypto skeptics- could use Terra’s crash as “Exhibit A” for the need for regulations.
In a recent interview with Bloomberg, Gensler blasted crypto exchanges for operating against their consumers’ best interests. Gensler has also rejected numerous attempts at a spot crypto ETF, citing investor holdings as a problem.
UST was also addressed by US Treasury Secretary Janet Yellen during a Senate Banking Committee hearing recently. Yellen advocated for more crypto regulation to avoid future financial disasters like Terra’s.
Stablecoin Death A Boon For CBDCs?
Governments might take advantage of the current stablecoin craze to launch their own digital currencies (CBDCs). Several countries, notably the US, are already working on their own digital tokens.
The Bank of England stated in March that stablecoins in their existing form posed a significant financial risk. It had advocated for more space regulation, as well as maybe a government-backed alternative.
This year, China, which has explicitly prohibited cryptocurrency, launched a digital yuan. India, which is becoming increasingly anti-crypto, is also planning to launch its own CBDC.