International Monetary Fund (IMF) managing director Tobias Adrian believes that algorithmic- and unsecured stablecoins are a major threat to investors. According to Adrian, it is quite possible that some stablecoins will go down this crypto winter.
Trouble ahead?
In conversation with Yahoo Finance on July 27, Tobias Adrian shines his light on the state of the crypto market. “It’s possible that we could see some more waves of selling, both in crypto-assets and in risk-assets and stocks. Furthermore, some digital coins may fail, with algorithmic stablecoins being particularly vulnerable,” Adrian told Yahoo Finance.
Furthermore, Adrian indicates that he also sees weakness in fiat money-backed stablecoins, after which he refers specifically to Tether. Adrian claims that Tether and some other stablecoins are not “one-to-one” backed by U.S. dollars. Later in the conversation, Adrian also gives his views on how he believes the industry should be regulated.
Global approach
If it were up to Tobias Adrian, crypto legislation would require a global approach. He believes this is necessary, because it is the only way to properly protect investors. Adrian also has ideas about how to do this. “It is difficult to determine for each cryptocurrency whether it qualifies as a security, therefore legislators should focus on the responsibility of exchanges,” Adrian says.
According to Adrian, it is up to exchanges to scrutinize the coins they list on their platform and make sure they are not nonsense. Exactly how he envisions that is not clear. After all, ultimately, as an exchange platform, you can’t know everything about a project.
Terra USD and the LUNA token linked to the ecosystem were also worth $40 billion together. Virtually no one had seen the collapse of that protocol coming. Otherwise it would never have been worth $40 billion. You can’t expect trading platforms to always provide certainty. Although a certain amount of scrutiny might not be harmful. There would have to be standards for that.
Terra USD not the only fallen stablecoin
So Tobias Adrian predicts more falling stablecoins this crypto winter. Most people know that Terra USD imploded this year, but few are aware of Deus Finance’s DEI stablecoin. This project also collapsed in May and now stands at $0.18.
Earlier this month, Sam Kazemian, the founder of Frax Finance, told Cointelegraph that he believes pure algorithmic stablecoins “just don’t work.”
Interestingly, Frax Finance has its own FRAX stablecoin that is part covered and part algorithmic. FRAX uses Circle’s USD Coin as part of their collateral. DAI, a decentralized stablecoin from Maker Protocol, also uses USDC. The more they manage to expand their market cap, the more USDC is needed.
Somewhere, that also creates another risk for USDC. Suppose, for example, FRAX or DAI collapses, then there is a chance that USDC will go with it. Especially if the market is not aware of the collapse of either of them. But that chance seems small. Kazemian also sees that as the only major danger to the ecosystem.