Stablecoins are not ideal MoE: ECB; Courtesy of Terra?

Sahana Kiran
Source – Unsplash

The downfall of Terra and its assets TerraUSDC [USTC] and Luna Classic [LUNC] sent shock waves across the globe. This not only caused immense loss to its investors but caught the attention of regulators as well. South Korea has been actively investigating the collapse of the project. Regulators from other countries, however, have been extensively scrutinizing the stablecoin ecosystem. Now, The European Central Bank [ECB] seems to have just joined the list.

Stablecoins were time and again given an upper hand due to their stability. However, defying its ethos, Terra’s stablecoin lost its $1 peg. Picking on the same point, the ECB rolled out a report titled “A deep dive into crypto-financial risks: stablecoins, DeFi, and climate transition risk.”

In the report, the ECB highlighted how the growth, innovation, and global cases have been surging. Therefore, regulatory oversight of the industry is essential. Elaborating on the reason behind this move, the ECB wrote,

“The critical function that some stablecoins serve in the wider crypto-asset ecosystem and for unbacked crypto-assets could have contagion effects for the financial system if at some point in the future unbacked crypto-assets pose a risk to financial stability.”

The ECB even pointed out how the lack of oversight on the stablecoin industry aided in the downfall of Terra.

Additionally, the report highlights why stablecoins aren’t a practical means of payment. The transaction speed, as well as the costs of these assets, aren’t at par with the real economy.

It should also be noted that the European Union has been working on the Markets in Crypto-Assets [MiCa] framework. In this, the regulators have been particularly curating regulations to protect users against a crash like Terra’s.

Terra is not the only culprit?

It seems like the collapse of Terra is the only concern for the ECB. Tether [USDT], the world’s largest stablecoin also lost its peg momentarily. The ECB report read,

“Amid the ensuing crypto-asset market stress, the price of Tether came under pressure, with the largest stablecoin temporarily losing its peg. Tether faced large outflows of more than 10% of its market capitalization, which it had to redeem by liquidating reserve assets”

Yet, the scare surrounding algorithmic stablecoins persists. Or does it?

Despite the recent downfall, the community seemed to be inclined towards USTC. At press time, the stablecoin was trading for $0.04989. While it remains over 90 percent below its $1 peg, it surged 704 percent above its all-time high.


The trading volume of both USTC and LUNC has also seen a significant surge. This certainly poses a question if the community has already forgotten about the whole Terra fiasco.