The de-pegging of algorithmic stablecoin, UST, from USD back in May, and the crypto slump that followed in June, (according to cryptocurrency data provider Coinmarketcap, the combined value of the cryptocurrency market has fallen by about 70 percent from its high in November 2021) has caused turmoil for CeFi Lenders, further driving price action and trading volumes ever lower.
Despite the dramatic events, there are several factors to consider before drawing final conclusions on crypto and its use in global business operations.
What happened with UST
Firstly, it’s important to remember that just because algorithmic stablecoin, UST crashed, not all stablecoins carry the same risk. Unlike our preferred stablecoin USDC, which is backed 1:1 by US dollars, UST is backed by another cryptocurrency, LUNA which has further links to Bitcoin. UST holders should be able to swap each UST for a dollar’s worth of LUNA. The supply of UST and LUNA is dynamically controlled by an algorithm, with the goal of keeping UST’s price steady at one dollar.
Exactly why UST became untethered from USD remains unclear, but in one night hundreds of millions of dollars worth of UST and LUNA were rapidly sold, causing a cascading effect which resulted in driving both UST and LUNA to zero. Previous coins that used similar mechanisms have been tested and failed several years ago. There are some examples of successful stablecoins such as Dai from MakerDao, which have managed to remain resilient to market tests, but this is not the norm.
Regardless of the differences in stablecoins, the UST crash has provided ammunition for regulators who have been warning that this would happen. The negative attention on stablecoins has been exasperated by the belief that the UST crash caused the subsequent crypto slump, however, a report from blockchain analytics platform Chainalysis, concluded that although it was a factor in the recent crypto market crash, it wasn’t the deciding factor.
Instead it appears the dropping values of Bitcoin and other major cryptocurrencies, is more closely correlated to the decline of high growth technology equities, which have been severely impacted by the current status of the wider global climate, proving how embedded crypto now is, within the macro-economic climate.
Some stablecoins are safer than others
From our perspective, these rollercoaster events only highlight the importance of using stablecoins that provide transparency and granular details of their reserve holdings. USDC reserves are held in segregated accounts in the United States, with regulated U.S. financial institutions in the form of cash and short-duration U.S. Treasuries, which are audited on a regular basis. Due to its transparency and reliability, USDC has been able to maintain its stability during this period, and even sell for a premium due to the industry's confidence in its value.
Stablecoins have proven a market need
The crash has not changed the use-cases for stablecoins for global business - they’re a fast and cost-effective way to make cross-border payments, particularly for high value B2B payments, and also a reliable store-of-value. Whilst we are still in the early stages of the crypto evolution, cryptocurrencies and the underlying blockchain technology has proven its worth and is already embedded into the global financial system. Despite the current crypto bear market, we are seeing continued growth and adoption in usage of stablecoins for the efficiencies they bring to payments and financial services.
If you’d like to discuss integrating our recommended stablecoins, or if you'd like to see our full list of cryptocurrencies, please book a call with our team where we can discuss which currencies are most prevalent in your markets.