Did the TerraUSD Crash Tarnish the Concept of Stablecoins?

Source: American Banker

When a stablecoin that was supposed to always be worth one U.S. dollar, TerraUSD, tanked last week, it sent a shock across the cryptocurrency markets. But did that crash tarnish the entire concept and value of stablecoins?

Some say no, because many existing stablecoins are different from TerraUSD, with better backing and reserves. Others say yes. (Terra itself did not respond to a request for an interview.)

"Of course TerraUSD tarnishes the concept of algorithmic stablecoins,” said Caitlin Long, founder and CEO of Custodia Bank in Cheyenne, Wyoming. “Some of us in the industry have been loudly warning that such a leverage flush was coming.”

Stablecoins should be issued by regulated banks, as federal regulators have recommended, she said.

Stablecoins are cryptocurrencies that are intended to be always worth one U.S. dollar. They are used by traders and investors to buy and sell digital assets using a stable store of value. 

The doubt that has now been cast upon whether stablecoins can be counted on as a reliable store of value affects the many banks that have stablecoins in the works, including Silvergate Bank in La Jolla, California, and Custodia Bank. It affects regulated providers of stablecoins like Circle and Paxos. It also affects any bank or investor thinking of using stablecoins to move money digitally or to trade cryptocurrencies.