Stable coins is a cryptocurrency known as pegged to the US dollar. Its market value has been expanding in the past few years, and its decoupling risk has always been like an "elephant in the house". But now, this risk has really erupted, and the "currency disaster" will follow, which may even endanger the stability of the traditional financial system.
Last Thursday, UST, the third largest stable currency, "algorithmic stable currency", and its sister token Luna were trampled by death. UST, which should have been anchored at US $1, plunged to 26 cents, leaving only less than 0.09 cents on Monday. After the value of Luna once evaporated by 99%, the largest stable currency "guaranteed stable currency" usdt fell below the US dollar that should have been anchored and once fell below 95 cents, and the price of bitcoin was pushed down to a new 16 month low again. As of 16:40 on May 16, Beijing time, the price of a bitcoin was US $29829, falling below the 30000 mark, halving from the high of US $70000 at the end of last year.
There was also news that Luna and ust had exhausted all the funds of jump crypto, and investors may ask for redemption and liquidation. The key is that jump trading is the largest market maker of NASDAQ ETF. Cryptocurrency investment management company Galaxy digital was also exposed to risk, which also exacerbated the decline of NASDAQ last week.
Ust and Luna cause "currency disaster"
"Fortunately, I don't have much UST, but it did return to zero overnight." A cryptocurrency exchange official told reporters.
Another institutional source mentioned: "the fund managed by a friend is close to zero. Originally, the cash out income was good, but it was settled equally, but it was shot in UST."
The collapse of the stable currency obviously hit the whole currency circle. Bitcoin fell below the $30000 mark last week, with the lowest price of $29735 on May 11, down more than 10% in 24 hours.
Specifically, as an "algorithmic stable currency", ust does not have the same amount of USD asset support as mainstream stable currencies such as usdt and usdc. The stability of ust comes from the mutual transformation and arbitrage space of two Terra blockchain tokens. Among them, Luna is the original token of Terra public chain, and its price is not stable, while ust is the algorithmic stable currency of Terra public chain and the "legal currency" of Terra ecology. When the price of ust exceeds US $1, the holder of Luna can convert the Luna into ust at the exchange rate of US $1 at any time and sell it at the market price. In this process, Luna is destroyed and ust is cast. With the rise of ust supply in the market, the arbitrage mechanism drives the UST price back to US $1. When the price of ust falls below US $1, the holders of ust can cast the UST back to Luna at the price of US $1 at any time and sell it for profit. In this process, the supply of ust in the market will decline, and the arbitrage mechanism will drive the price of ust back to $1.
When the market is booming, this upward spiral is played with wind and water. Because when the price of ust is higher than US $1, the price of Luna will continue to rise, the capital will continue to flow in, and the supply of ust will continue to rise due to the continuous purchase of Luna for arbitrage. However, when the price of ust falls below US $1 and cannot return to US $1 for a long time, the arbitrage of casting ust back to Luna at the price of US $1 will lead to a sharp rise in Luna supply in the market and a decline in its price. The lower the Luna price, the more demand for destroying ust to generate Luna, which further depresses the Luna price.
Last week, ust has been trading below US $1, which makes investors lose confidence in terra, the issuer of stable currency, and intensifies the selling pressure of UST. Finally, the prices of ust and Luna may both return to zero. This risk has been triggered.
"The market fluctuations in recent days have exacerbated the decline of Luna, which in turn led to the serious disconnection of UST, which led to a large number of runs, and ust has officially stepped into the 'death spiral'." Zhao Wei, a senior researcher at Ouyi Research Institute, told reporters that the Federal Reserve released the latest financial stability report on Monday and stressed the risk of running on a stable currency. The data show that ust has decoupled from the US dollar twice in just three days. At the same time, coinbase, the largest digital currency exchange in the United States, has a long-term negative premium of stable currency price, and the capital outflow is obvious. In order to prevent the decline of currency price, stable currency issuers continue to reduce the issuance volume, which proves that the market demand has decreased.
According to the reporter, some exchanges have taken remedial measures in advance. For example, since the Luna price fell to 65usdt and ust on May 8, there was a short decoupling for the first time, triggering the risk control system. Ouyi OKx has started the automatic redemption mechanism to redeem all users' assets from the chain for distribution. Tens of thousands of users were involved in this event. When the redemption arrived, the UST price was 0.996usdt, which basically avoided clearing the account overnight. However, most holders of ust still suffer losses. Cryptocurrency exchanges binance and FTX have suspended trading. Last week, binance announced the suspension of Luna, ust redemption, network congestion and the suspension of derivatives trading, highlighting the evaporation of capital and confidence of the whole virtual currency system.
Stable currency raises financial risk concerns
In fact, the market value of "algorithmic stability currency" ust is still small and the overall impact is controllable. However, if it is, for example, usdt of "guaranteed stability currency", the same risk will undoubtedly cause a serious impact on financial stability.
"Guaranteed stable currency" refers to the use of assets such as US dollars or US bonds as reserves to support the price of stable currency. Take usdt as an example. Most usdts are issued in the form of tokens on the bitcoin blockchain through Omni layer protocol. Each issued and circulated usdt is linked to US $1, and this part of US dollars is stored in tether. At the time of redemption, the usdt holder can exchange the usdt for legal currency or bitcoin.
However, the question of "guaranteed stable currency" has never been interrupted. In particular, tether has never publicly proved whether there is a corresponding US $1 mortgage for each stable currency issued. The relationship between usdt and bitfinex, the world's largest bitcoin exchange, has also become the focus of doubt. According to public information, tether, the issuer of usdt, was established in the British Virgin Islands by bitfinex's Chief Strategic Officer and chief financial officer. Tether and bitfinex's CEO, CFO and Chief Strategic Officer are highly consistent. In other words, the only reason investors holding usdt continue to "buy" is to believe in the cashing capacity of bitfinex as the world's largest bitcoin exchange. However, once this "consensus" is broken, it is obvious that the value of the "guaranteed stability currency" can no longer be stable.
The holders of stable currency are worried that when the risk comes, they cannot convert the stable currency into legal currency, so investors try to cash out quickly. In order to meet the redemption demand, the issuer of the stable currency will have to sell the assets supporting the value of the stable currency. On the contrary, it will lead to a large number of sales of safe assets such as US bonds, which will hurt the key link of the financial system. At the Senate hearing on May 10, US Treasury Secretary Yellen said that legislation to stabilize the currency regulation is imminent, and the financial stability Regulatory Commission (FSOC) is trying to identify the risks that those digital assets will pose.
Traditional financial markets also need to be vigilant
It is not difficult to find that if usdt and other "guaranteed stable currencies" are forced to decouple, the US Treasury bond and commercial paper markets may also be affected. The shock of US stocks is also inevitable. "The collapse of ust last week obviously led to the expansion of the decline of the NASDAQ index." The investment manager of a small and medium cap growth stock fund in the United States told reporters.
Insiders told reporters that earlier, tether failed to provide the promised audit report to the government, so there was not enough evidence to show that there were enough reserves to support tether tokens. In October 2021, the commodity futures trading commission imposed a fine of US $41 million on tether for allegedly misrepresenting its reserves. It is also reported that tether's funds flow from Taiwan, China to Puerto Rico, France, Bahamas, etc.
In addition, tether has been making potential profits for itself by investing in reserves, which is also a very high risk. It is not a stable currency in disguise, but a high-risk offshore hedge fund. Last year, it was reported that about US $30 billion of its US dollar assets were invested in commercial paper to the company, which will make tether the seventh largest holder of such debt, close to the same level as the famous fund companies Charles Schwab and vanguard. At present, the market value of usdt continues to expand. Earlier, Bloomberg mentioned that tether's asset audit is a rough estimate, and the worst case is that its assets do not exist at all. If the asset reserve behind the usdt is insufficient, it is a very dangerous action, which may lead to the collapse of the whole usdt, which will have a negative impact on bitcoin, because 70% of bitcoin transactions are completed by using usdt.
The whole "coin circle" is facing challenges. Joseph Carlson, former chief economist of LianBo, recently published an article that the Federal Reserve needs to raise the federal funds rate to 6% to reverse the inflation cycle, far exceeding the current market consensus. When the liquidity feast is over, the experiment of eliminating the false and preserving the true begins.