Crypto fund manager: “There are some inconsistencies with Tether”

Crypto fund manager: “Good stack coins should not be regulated”

The crash of stablecoin TerraUSD also had a short-term impact on Bitcoin and other cryptocurrencies

© IMAGO / Lobeca

After the crash of the stablecoin Terra and the partner currency Luna, there are hangovers in the crypto scene. Are other stack coins like Tether threatened? What should investors do in the current phase? Ha Duong, head of two cryptocurrencies, provides answers

CAPITAL: Mr. Duong, the crypto scene has had one of its worst weeks. First, stablecoin imploded TerraUSD (UST) and took its partner currency Luna with it, also hitting the bitcoin price, which has fallen to a 18-month low. Specifically: What mechanisms have been used in the past week?

HA DUONG: The development did not just start in the last week. In general, the crypto markets have recently developed sharply downwards with the other markets. There were several macro reasons for this: For example, the Fed’s monetary policy, which draws liquidity out of the market. The crypto themes have also suffered as a result – overall, we are in a very negative market mood. In the past week, the implosion of Terra has also been added. The strong UST sale from a whale, that is, a large investor, has caused a UST depot below $ 1. For critics, this was an opportunity to sell stablecoin UST and the Luna token, partly through short sales, so Terra collapsed within a very short time.

And why did it hit bitcoin so hard in the short term?

For this you need to understand the system behind stack coins, or rather behind TerraUSD. Basically, stack coins are pegged to a different value, usually one to one to the dollar. Secured stack coins like USDC deposit the same amount of US dollars for each stack coin. This should make stack coins safe from fluctuations and bring confidence to the market. However, Terra is not hedged by USD or other assets and only represents the link to the USD exchange rate through an arbitrage mechanism. This can work in principle, but not if there is as strong a sell-off as last week. To secure its bond to the dollar, the Luna Foundation Guard had to sell its bitcoin reserves for nearly $ 3 billion to strengthen UST. Even this sum was not enough to prevent the fall of UST. The sharp sell-off of BTC together with the general negative price development in the crypto market has also triggered a liquidation cascade in the market, so that Bitcoin has briefly fallen to below 26,000 US dollars. In the meantime, however, we again see a slight stabilization in the entire crypto market.

How big is the loss of confidence caused by the recent crash?

It depends on where you are looking. Confidence in algorithmic stack coins has undoubtedly been damaged. Other stack coins have also come under stress for a short time. But I do not see the big problem here in the long run. If you look at the various DeFi protocols that have come under stress in the same week, you can generally say that the protocols have held up really well and work stably – unlike before, for example during the Corona crash.

Stablecoins have been under criticism for a long time. In the United States, Treasury Secretary Janet Yellen has now warned against them. Within the EU, the digital expert Stefan Berger (CDU) is in favor of regulating “systemically important” stack coins. Are these warnings justified?

It is certainly right to think about how to better protect users. However, one must look at it differently. The Terra Fund’s communication was always transparent, all investors knew what they were getting themselves into. From my point of view, there is no scam to be seen here. But the question is also to what extent one wants to prevent a systemic risk. The Terra / Luna implosion was large, but not gigantic. This could look very different with the larger stack coins like Tether. Stablecoins are not all the same and it depends on how the stability mechanism works. I would think it would be a shame if good stablecoins like USDC also came under regulatory pressure because of Terra.

How big is the risk there? Tether also briefly noticed the Terra crack and is still slightly below the target value of 0.96 cents. The coin is still criticized …

With Tether, there are always rumors of scams and, in fact, some inconsistencies. There is a lack of transparency and that is clearly a problem. Basically, though, I think the crypto is now much better positioned than it was a few years ago, when it was much more dependent on Tether – also because there are now significantly more investors, both private and institutional, involved. For example, if Tether’s reserves are not 100 percent secured and a few percent are missing due to losses, I think society would find a solution – for example, to add the missing money.

Do you really not need any regulation here?

My hope is that the community regulates itself and not everything is dictated by politics. The fully dollar-linked stablecoins were not an issue here and should not be penalized.

Are stack coins “systemically relevant”, as Stefan Berger thinks? Some from the scene think that it could also work without stack coins …

Today I want to say: No, it’s not possible. Without stack coins, trading volume on weekends and overnight would be non-existent, which could lead to severe market inefficiencies. Crypto assets are traded 24/7. In the future, instant payment systems like FedNow will come. Once these exist, dependence on stack coins can be reduced.

What are you advising your investors in the current weakness phase: Get out, switch or sit out?

I would advise everyone to sit outside. There is a saying: Time in the market beats market timing. It is almost impossible to time a market as young as cryptocurrencies. And yet, you should only invest in crypto if you believe in it in the long run and assume that technology has value.

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