Crypto’s bruising comedown has exposed weaknesses in the plumbing of the system. The problems lie with the market for stablecoins
Save time by listening to our audio articles as you multitaskThe sell-off comes as the Federal Reserve begins raising interest rates. Tech stocks, high-yield bonds and other risky assets have also swooned. But crypto’s bruising comedown is interesting for a deeper reason: it has exposed weaknesses in the plumbing of the system.
From May 9th, terra, then the fourth-largest stablecoin by market capitalisation, began to unravel. The implosion put pressure on tether, which is meant to be pegged one-for-one with the dollar. On May 12th its price dipped to 95 cents. Some $9.1bn in tether has since been redeemed for cash. The technology associated with crypto may be newfangled, but to students of financial history, these events look familiar. They resemble the confidence crises that precede bank runs.
That system worked as long as luna had some market value. But on May 9th the price of luna began to slide. And that in turn put pressure on terra’s peg—causing a rush to redeem. The supply of luna ballooned. On May 10th 350m tokens existed. By May 15th 6.5trn did. As the price of luna collapsed, terra also went into free fall. Its price is now hovering at around 10 cents. Luna is worthless.
Terra’s implosion has had wider and more worrying repercussions: it has prompted flight from tether. Those fleeing may have felt anxious about the lack of detail regarding tether’s backing. The company once said it backed its tokens with “dollars”, a claim New York’s attorney-general said in 2021 was “a lie”. Now the firm says its tokens are “backed 100% by Tether’s reserves”.
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