This crypto that seeks to solve SEC crackdown is up 6,000% in 2021

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The United States Securities and Exchange Commission (SEC) reported a big change in the control of cryptocurrencies last week, as one of the world’s largest crypto exchanges revealed it was barred from launching a new crypto lending product.

As Coinbase CEO Brian Armstrong explained, the SEC has challenged the company’s plans to pay interest to customers so that they can earn up to 4% on their crypto assets. The particular crypto asset that Coinbase was about to offer on 4% was the least volatile asset it is offering, a stablecoin called USDC, which tries to stay pegged in value at $ 1.

As Armstrong also lamented on Twitter, other crypto companies have lent and offered interest on crypto holdings, like bitcoin, ether, and USDC for years. BlockFi, for example, is currently offering 8% interest on the stablecoin issued by the famous Winklevoss twins. But as anyone watching the crypto space knows, regulators are talking more and more about the need to crack down on exactly this practice. Federal Reserve officials, for example, even called out USDC’s competitor Tether for potentially presenting a risk to the traditional financial system if investors rushed to buy back their Tether tokens for $ 1.

The reason is, as Boston Fed Chairman Eric Rosengren explained in June, that neither Tether nor USDC was fully secured by an equivalent dollar amount in a bank. While Coinbase and the Tether issuer each announced that the two coins were backed 1 to 1 by dollars in the bank, in reality they both held a mix of cash and assets that included bonds and debt. business that could lose value. Theoretically, if the value of those other assets were to lose value quickly, investors could rush to swap tokens for dollars triggering the crypto equivalent of a bank run, Rosengren said.

Circle, the company behind USDC, recently announced that it would only hold cash and short-term Treasuries to support its stablecoin. On the same day, Coinbase apologized for arguing that USDC was securely backed by dollars in the bank, even though it was not. Tether still holds riskier assets as collateral although it has released more information on what it holds to support its stablecoins as part of a settlement with the New York attorney’s office.

The story continues

And frankly, everything is a problem for crypto.

Not only that an industry that prides itself on breaking from the shackles of the traditional financial system is still so dependent on it, but also the fact that regulators might have an easy way to block the coin ramp. stable that fed the flow. money in crypto. In total, the stable coin market cap has grown from around $ 20 billion at the start of the year to $ 120 billion now. Most of that was driven by Tether and USDC, increasing their market caps this year by 221% and 538%, respectively. Although they remain the two biggest stablecoins at around $ 66 billion and $ 26 billion, respectively, there is a newcomer that is growing faster than the two.

Top stablecoins Tether and USDC have seen their market caps rise so far in 2021. Investors often look to holding stablecoins during times of volatility instead of cashing in physical dollars.

As its founder Do Kwon told Yahoo Finance this week, it is not backed by cash. It is not backed by bonds. It is not supported by anything that would affect the traditional banking system. Instead, Terra Labs’ UST stablecoin is backed by another paired cryptocurrency that is burnt or converted to keep the same peg at $ 1.

“The reason this is valuable is that there is a lot of regulatory movement from jurisdictions around the world to detect the underlying bank accounts under stablecoins,” he said. “The reason decentralized currencies like Terra are important and get a lot of attention is that they are free from these elements in the sense that, since there is no censurable deposit underlying, the logic that governs the monetary policy of these stablecoins is entirely free of censorship. “

Terra’s UST saw its market capitalization drop from $ 181 million at the start of the year to $ 2.5 billion in September, a growth rate of over 1,200%. It is now the fifth largest stablecoin in the world and is making strides to become more frequently used in decentralized finance, or DeFi, applications that allow investors to earn interest on their crypto holdings, similar to what Coinbase had l ‘intention to do before being blocked by the SEC. . As Kwon notes, while some decentralized apps can’t be shut down by regulators like Coinbase, they could still be censored if the stablecoins they use on their platforms are pegged to the banking system.

“Even though the type of logic of these DeFi apps is decentralized, if the underlying money can be censored, that defeats the purpose completely,” he said.

Terra’s UST stablecoin has seen its market capitalization grow much faster than the rate posted by the two largest stablecoins this year.

Of course, it should be noted that stablecoins like the UST that are not backed by real assets (called algorithmic stablecoins) are inherently risky. Earlier this year, one of those projects, IronFinance, saw the cryptocurrency that supports it plummet from $ 60 to $ 0. He even trapped people like Shark Tank’s Mark Cuban, who lost money on the project and then called on regulators to do more to protect investors. For a number of reasons, including a $ 25 million investment from cryptocurrency broker Galaxy Digital and Terra’s robust payment system used by more than 3 million people in South Korea, Kwon says his project is different from others who failed.

“There are a lot of algorithmic stablecoins out there and to our critics’ credit most of them have failed,” he said. “The reason is to create an algorithmic stablecoin, the main challenge is not to design a smart algorithm… but it is really about creating use cases around the economy.”

To this end, Terra has built an ecosystem to leverage its UST stablecoin. It now offers a savings platform that offers 20% interest on its stablecoins called Anchor. It also offers tokens that mimic exposure to US stocks, giving access to investors around the world who might otherwise not be able to trade in the country. Its PayPal-style Chai payment application in South Korea, launched about two years ago, generates more than $ 1 billion in payments per year.

“I think these use cases somehow bolster the stability of Terra stablecoin and make it more useful as a currency overall,” Kwon said.

As more and more money poured into the UST, the cryptocurrency that backs it, Luna, has appreciated nearly 6,000% since the start of the year. In May, however, when the price of bitcoin collapsed by around 40%, Luna suffered an almost 80% crash. Investors began to panic as the UST stablecoin moved away from its $ 1 peg to drop to around 89 cents. By comparison, during the 2008 financial crisis, the US financial system nearly went into collapse mode when a popular reserve fund “broke the ball” from its net asset value of $ 1 to just $ 1. 97 cents. The Fed stepped in to save the day, but no such central bank exists for crypto.

In last week’s crypto flash crash, which saw bitcoin briefly collapse over 10%, Luna fell around 20%, but UST remained stable at $ 1, prompting a one-word tweet. from the founder of Terra.

“Poetry,” he tweeted.

Zack Guzman is a presenter for Yahoo Finance Live as well as a senior writer covering crypto, cannabis, startups and breaking news at Yahoo Finance. Follow him on Twitter @zGuz.

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