The crash of Terra’s UST has sparked serious debate over the future of the stablecoin space, while seriously affecting the sentiment of the crypto market. UST de-pegged from the dollar earlier this week, and has since struggled to regain its 1:1 peg. Founder Do Kwon and the Luna Foundation Guard’s corrective measures have done little to make up for its losses.
The world’s largest stablecoin, Tether (USDT), is also under selling pressure and is trading down more than 4% from its $1 peg. This weakness has fueled speculation that governments may use it as an example in issuing tough regulations on the cryptocurrency industry.
Will the government ban stablecoins?
In the wake of this recent crash, the US Securities and Exchange Commission (SEC) may impose more restrictions on stablecoin issuance. A common theme among governments calling for more crypto regulations is investor protection. With Terra wiped out billions of investors’ money in just a few days, they may have a strong point.
leading crypto lawyer John Deaton said SEC Chairman Gary Gensler, and Senator Elizabeth Warren—both outspoken crypto skeptics—could use Terra’s crash as “Exhibit A” to require regulations.
In an interview with Bloomberg, Gensler recently criticized crypto exchanges for acting against the best interests of their customers. Gensler has also foiled several attempts at spot crypto ETFs, citing concerns over investor holdings.
US Treasury Secretary Janet Yellen also mentioned UST during a recent Senate Banking Committee hearing. Yellen called for better crypto regulation to prevent potential financial risks such as Terra’s crash.
Is the death of stablecoins a boon for CBDCs?
Governments can use the existing stablecoin route to launch their own central bank digital currency (CBDC). Several countries, including the United States, are already working on developing their own digital tokens.
In March, the Bank of England said stablecoins in their current form pose a major financial risk. It also called for better regulation of space and possibly a government-backed alternative.
China, which has banned cryptocurrencies outright, introduced a digital yuan this year. India, which is increasingly taking an anti-crypto stance, also plans to introduce its own CBDC.
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