Asia BRI chief: TerraUSD implosion is proof that stablecoins can’t function like cash

Asia-Pacific Head of Bank for International Settlements (BIS) finds that the recent collapse in the value of stablecoins demonstrates that they are unsuitable as a form of money and that their attempt to piggyback on central bank issued currency does not offer the stability that their name involved.

TerraUSD Cascade revealed the instability of stablecoins

The fall of several stablecoins, notably TerraUSD, which was the third largest with a market capitalization of US$18.7 billion at its peak, has show the dangers of cryptocurrencies, according to Siddharth Tiwari, chief representative of the BRI’s Asian office.

“​​These structural shortcomings cannot be resolved by technical fixes alone. Indeed, they reflect the inherent limitations of a [decentralized] system built on blockchains without permission,” the BIS report states.

According to BRI, recent events show us that the stablecoin is not achieving the full impact on the network that we would expect from silver. Stablecoins differ from cryptocurrencies like bitcoin and Ethereum in that their value is tied to another asset, either fiat currency or a commodity, which makes them potentially immune to dramatic price movements.

However, in the case of so-called algorithmic stablecoins like TerraUSD (UST), the relationship to the value of the underlying asset can be thin and, as the recent crash proved, unstable. The UST is meant to reflect the value of the US dollar through an algorithmic relationship with its sister currency, Luna, which also fell along with the UST. The problem was that the UST was not backed by any real assets. It was intended to maintain a peg with the US currency by being convertible into a Luna dollar and vice versa.

However, real-asset-backed stablecoins, such as Tether (USDT) and USD Coin (USDC), whose values ​​are individually pegged with US dollar reserves, were not immune to the unpeg. Following the fall of TerraUSD, USDT briefly lost its peg as the cryptocurrency market as a whole saw a sell-off.

Stablecoins Can Still Be Useful, But Only As A Framework, Says BIS

But while the BIS thinks stablecoins have failed in their goal of maintaining a value that would make them a crypto ramp for fiat-based transactions, they have also failed. declared that it could provide the necessary framework to create digital equivalents of fiat currencies. In terms of execution, the People’s Bank of China (PBOC) already holds a considerable lead in the Asia-Pacific region. It has collaborated with the central banks of the United Arab Emirates, Thailand and the Hong Kong Monetary Authority (HKMA) to create the transnational platform “mBridge”.

The BIS Innovation Hub is collaborating with the central banks of Singapore, Malaysia, Australia and South Africa on comparable prototypes. According to an article published by the BIS, central banks are better placed to offer the heart of the future monetary system because of their fundamental role in guaranteeing the irrevocability of payments by using their balance sheets as a trusted intermediary.

Related Articles: Terra 2.0: Luna cryptocurrency is back after a $40 billion crash – is it better this time?

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