Stablecoin: A cautionary tale about monkeys, cats and potato chips

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Bad news keeps coming for crypto. Euromoney is shocked to learn of a series of flash lending attacks on the Feed Every Gorilla (FEG) token on Sunday. A hacker took advantage of a loophole in the project’s exchange mechanism to use the same collateral 10 times to drain crypto worth $1.3 million to 10 different addresses.

This is just the latest monkey when it comes to crypto.

Still, major cryptocurrency markets saw a modest recovery over the weekend from the death spiral in Terra’s UST, with the so-called stablecoin now quoted as worth just $0.16. .

Let’s recap on stablecoins, as they are the only group of crypto assets that are supposed to be non-volatile.

These are the crypto-casino gambling chips. Investors are exchanging their real dollars for dollar stablecoins because they can more easily move tokenized dollars between crypto tables and bet on Bitcoin, Ether, or any other decentralized finance (DeFi) protocol they like.

If large stablecoins can maintain user confidence and not have to sell collateral, the fallout from the latest crypto panic on real-world financial markets could still be quite limited.

UST, for example, as part of the Terra ecosystem, has often been involved in the Anchor protocol promising investors a 20% return, which to the cautious may sound almost too good to be true.

If investors have anything left at the end of the daily frenzy, they should at least be able to take their few remaining dollar stablecoins home and trade them again one-for-one for real dollars.

Stablecoin chips are essential to the whole crypto game. The two largest are Tether (USDT), with a current market cap of $76 billion, and Circle’s USDC, with a market cap of $51 billion. They compare to JPMorgan’s first money market fund (MMF), the largest fund of its kind, with $70 billion in assets under management at the start of this year.

Terra’s UST had a market cap of $18 billion on May 9. On Sunday, it was just $1.8 billion.

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Mike Novogratz, Galaxy Digital

Mike Novogratz, Galaxy Digital

There may still be a future for stablecoins such as Tether and USDC that are backed by true fiat guarantees. UST was an algorithmic stablecoin with a floating-price sister token, Luna that would allow users to take a dollar from Luna and buy or sell UST if it slipped to $98 or rose to $102 for modest arbitrage.

Arbitrators were supposed to keep the UST stable. Billionaire Mike Novogratz, a former Goldman Sachs partner and founder of Galaxy Digital – a listed blockchain and crypto investing vehicle – who likes to proclaim his enthusiasm for NFTs and other digital assets for the benefit of his subscribers, had been a fan of the Luna token.

It was the classic denominational system. The belief in her has just collapsed. Theos

Dollar stablecoins are supposed to maintain a stable value of $1. So when the UST pulled out last week, it further fueled the broad selloff that had already caused the combined market capitalization of all cryptos to plummet from $2.9 trillion in November to $1.54 billion. May 9.

On May 12, the market touched $1.13 trillion before bouncing back to $1.22 trillion on Tuesday, May 17.

It’s still a 58% drop from the all-time high – the crucial question is whether this is a dead cat bounce.

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Mark Haefele, UBS Global Wealth Management

Mark Haefele, UBS Global Wealth Management

Mark Haefele, Chief Investment Officer at UBS Global Wealth Management, says: “As the monetary regime that fueled the crypto rally unfolds, we believe investors should avoid trying to call a floor on these highly valued assets. speculative”.

Bitcoin, which was worth $46,000 at the start of this year, fell to $26,600 at one point last week, before rising to $29,700 on Monday. Like the market as a whole, it is down 56% from its record level.

Where it goes from here, Euromoney has no idea, but Novogratz talked about comparing it to the Nasdaq in a risk-free world, when Galaxy announced a loss of $112 million in the first quarter on May 9.

Novogratz says the crypto will trade in a very volatile, choppy, and challenging market “for at least the next few quarters.”

Late last week, Galaxy provided an update amid the ongoing panic, pegging its second-quarter losses through May 11 at around $300 million. Galaxy claims to have $1.6 billion in liquidity, split equally between cash and digital assets, with “the majority” of these net digital assets in non-algorithmic stablecoins.

How will Terra’s demise impact these non-algorithmic stablecoins? Tether and USDC are different from UST: they are backed by collateral.

Tether, the oldest and largest dollar-denominated stablecoin, now shows basic information about its collateral, with most of it being cash and cash equivalents, such as short-term treasury bills, monetary funds and commercial paper (CP) holdings of A2 and above-rated issuers.

On May 12, at the height of the panic, he said he was continuing with business as usual and had exchanged $300 million of his USDT for real dollars without incident in the past 24 hours and was processing $2 billion. dollars that day with no problem.

But Tether briefly touched $0.95 that day before falling back to $0.999. The volume of its stablecoins in circulation decreased by $83 billion on May 11.

Tether has a story. The Commodity Futures Trading Commission (CFTC) found in 2021 that, contrary to its claims, it was not 100% backed by fiat currency between June 2016 and February 2019. digital tokens, 5.27% in collateralized loans, 4.61% in corporate bonds, funds and precious metals, and 83.74% in cash and cash equivalents, including treasury bills and CP.

Bank of America analysts suggest that Tether’s CP holdings are non-traditional as no broker or issuer knows Tether’s specific flow, adding. “We continue to believe that Tether’s CP holdings are likely acquired through an issuance on the blockchain that is not registered with the SEC or DTCC. [Depository Trust & Clearing Corporation]. Tether or other stablecoins could also acquire CP denominated in foreign currencies and hedge their currency risk to US dollars.

Circle’s USDC is backed solely by cash and US Treasury bonds, and this is regularly audited by Grant Thornton’s accountants. It was listed at $1 on Monday.

If large stablecoins can maintain user confidence and not have to sell collateral, the fallout from the latest crypto panic on real-world financial markets might still be quite limited.

UBS points out that crypto is still not widely held and only a small number of individuals hold the bulk of the market. They now see central monitoring as a way to save their casino.

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Mathew McDermott, Goldman Sachs

Mathew McDermott, Goldman Sachs

Going forward, stablecoin regulation will likely focus narrowly on collateral. If others crash – including smaller ones backed by other cryptos, like Kava’s USDX which is now trading at $0.81 – only holders will care.

Fitch says ties between crypto markets and regulated financial markets remain weak, adding, “However, many regulated financial entities have increased their exposure to cryptocurrencies, DeFi and other forms of digital finance. in recent months, and some issuers rated by Fitch may be affected. if crypto market volatility becomes severe.

On Monday, Elwood Technologies – a platform aimed at providing institutional-grade access to digital asset markets and liquidity venues – announced that it had closed a $70 million Series A funding round, co -led by Dawn Capital and Goldman Sachs.

Other prominent investors include Barclays, CommerzVentures and Novogratz’s Galaxy Digital Ventures.

Mathew McDermott, Global Head of Digital Assets at Goldman Sachs, says, “As institutional demand for cryptocurrency increases, we have actively expanded our market presence and capabilities to meet client demand.”

The panic over the past week suggests that institutional demand may have passed its peak for the time being, but the crypto has seen numerous 50% drops and is rising again.

Like the classic B-movie monster, it never dies.

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