Highlights
  • Not since 2018 has the crypto market seen such a terrifying crash and collapse.
  • Speculation is rife that the TerraUSD implosion was market manipulated.
  • Financial regulators now flag that stricter scrutiny of stablecoins is on the cards.

When the Terra stablecoin sensationally imploded last week, many cryptocurrency cronies pondered whether they had witnessed the death of a major blockchain.

TerraUSD, which is abbreviated to UST, has seen its value drop from US$1 apiece just a week ago to just US$0.089 today (May 18).

Terra, which has the ticker symbol LUNA, is the native token used to keep TerraUSD (ticker UST) stable - the main and largest stablecoin created by Terra Labs, with a 1:1 peg to USD.

The crypto, which was once ranked among the 10 most valuable cryptocurrencies, crashed almost completely last Thursday. Its sister token Luna fell by more than 97% before collapsing close to zero the next day.

When the US dollar peg of the stablecoin imploded, pundits suggested it had the telltale signs of a classic ?bank run?. A bank run occurs when hordes of clients withdraw their money from a bank as they believe it may cease to function in the near future.

After Terra?s collapse, the Reserve Bank of Australia (RBA), the Australian Prudential Regulation Authority (APRA), and US Treasury Secretary Janet Yellen, all flagged that tougher scrutiny of stablecoins were on the cards.

There have been allegations that investment firm BlackRock and global ?market maker? Citadel Securities sparked the crash (which they deny).

Speculation abounds that 100,000 Bitcoins (worth about US$2.7 billion) was borrowed from crypto exchange Gemini to purchase TerraUSD.

Gemini denied such a loan occurred.

It was then alleged the duo planned on dumping all the assets, effectively creating a run on the market, wiping nearly US$28 billion off the market value of sister token Luna and triggering a deluge of forced selling in both assets.

As BlackRock and Citadel deny the claims, some analysts believe that only the actions of massive institutional investors could trigger such a tumble.

The TerraUSD crypto token is supposed to be pegged to the price of the US dollar and is therefore considered stable. However, after last week?s events, some believe TerraUSD might not be as stable as first thought.

Importantly, TerraUSD is not a centralised stablecoin that is exchangeable for a fiat currency but rather is decentralised, meaning it can be exchanged for Luna (LUNA) tokens, which is another crypto tied to the Terra blockchain.

While the collapse saw crypto selloffs across the board as fears grew that other stablecoins could follow suit (which they did), it?s not the first major crash to occur in the fragile financial ecosystems of blockchain.

It?s unlikely that TerraUSD is completely dead in the water. The crypto sector has seen bloodbaths before.

In 2017, which was considered a landmark year for decentralised digital currency Bitcoin, it went from breaking its own record to peak at US$20,000 before plummeting to below US$12,000 as investors harvested gains from the bubble.

By 2018, the great crypto crash reared its head. It featured the sell-off of most cryptocurrencies and saw the price of Bitcoin fall by about 65% during the month from 6 January to 6 February.

Since then, Bitcoin has not only survived but thrived and while it has been a volatile year for the digital coin - it reached more than U$64,000 in 2021- it is today trading at $29,740.

As the TerraUSD issue unfolds, there have been suggestions from Commonwealth Bank CEO Matt Comyn, who heads up one of the first major banks to closely link to crypto, that it?s just a matter of time before stablecoins are regulated.

He said providers will inevitably be subject to bank-like liquidity and asset-backing rules to protect the stability of the financial system.