Stablecoins are digital currencies theoretically designed to remain stable, as the name implies, and not be subject to the strong fluctuations of traditional digital currencies such as Bitcoin. This theoretical stability is pursued either by holding liquid assets such as coins, stocks, and high-record bonds in an amount expressed in dollars equivalent to the coins in circulation or through algorithms that automatically manage sales and purchases to regulate the value of the digital currency. In recent days, however, “Luna” and “Terra”, two of these algorithmic stablecoins have not only lost parity with the dollar but have plummeted below 30 cents. 21Shares Terra Etp, a financial product that replicates the value of the digital currency and is listed in Swiss francs, has lost 99% of its value to 0.01 francs. Terraform Labs announced today that it will discontinue new activities on the Terra blockchain, effectively pulling the plug on its algorithmic digital currency and related Luna tokens.
In what is becoming a worrying domino effect, the stablecoin Tether also broke its parity with the dollar by dropping to 96 cents. The problem here is that even for non-algorithmic stablecoins, information on exactly what is in the reserves that should guarantee 1 to 1 convertibility is scarce and does not comply with accounting standards. Paolo Ardoino, Tether’s chief technology officer, said the group is ready to ensure full convertibility with the dollar “at any cost”. However, the company declined to disclose details on the composition of the $ 40 billion US government bond portfolio that should ensure the exchange’s resilience. In any case, it is the whole world of digital currencies that is under great pressure, so much so as to arouse growing alarm in the authorities that supervise the markets. As the Federal Reserve recalled three days ago, the stablecoin market alone is worth a total of $ 180 billion with Tether, USDCoin, and Binance USD making up 80%. According to data from CoinMarketCap, the total capitalization of digital currencies fell by $ 200 billion in 24 hours.
U.S. Treasury Secretary Janet Yellen said today that the problems of the past few days highlight the risks of these products that “claim to be pegged to the dollar”. She then called for new rules and added that the Treasury is working on a risk report. “New products and technology may present opportunities to promote innovation and increase efficiencies,” Yellen said. “However, digital assets may present risks to the financial system, and increased and coordinated regulatory attention is necessary.”
Meanwhile, bitcoin dropped to $ 25,000, the lowest since December 2020. Ether slipped up to 12%. The stock of the platform for the trading of digital currencies Coinbase yesterday lost 26% after disappointing quarterly data which highlighted, among other things, a slowdown in inflows. In this situation, El Salvador, the first country to have adopted Bitcoin as its legal currency, risks being crushed. Since the country made this choice, the value of the digital currency has dropped by 40%, according to rating agencies. If things do not change the country will quickly move towards default. The Citadel fund and the Blackrock giant said today that they were not involved in the collapses of these hours, denying rumors circulating on social media of a bearish action by the two big names in finance.
In recent weeks, digital currencies have shown a very high correlation with stock markets, Nasdaq in particular, following them in declines and confirming the inability to play the role of alternative currency due to strong fluctuations. It should be noted that digital currencies spread after the financial crisis of 2008, in an anomalous monetary context, characterized by abundant liquidity. Now that central banks are starting to reduce the amount of money in circulation, the hierarchy of financial products is strengthening. Apart from the currency, the dollar, in particular, all the others are promises of payment of money (bonds, shares, derivatives, etc). When monetary conditions are loose, this hierarchy fades. When they tighten it restores itself. For digital currencies, this phase becomes a litmus test to verify how they behave in a less expansive monetary phase that they have never experienced. The signs are so far not encouraging.