TerraUSD Fallout – Debating the Future of Stablecoins and CBDCs

Thomas Murray Digital Newsletter

Following the recent failure of the TerraUSD algorithmic stablecoin, the fallout affecting the cryptocurrency markets and the policy questions that the incident raises have continued to dominate discussions. At issue are what – if any – role privately-operated stablecoins may have in the future of wholesale and cross-border settlements, the parameters and priority of stablecoin regulation, and the degree to which Central Bank Digital Currencies (CBDCs) – previously viewed by some major economies as more relevant to retail applications – could assume wholesale roles. We summarise those discussions and evaluate some of the other winners and losers in the stablecoin market.

Digital Asset Developments


Following the publication of the US Securities and Exchange Commission Staff Accounting Bulletin (SAB) 121 – which prompted Coinbase to present client assets as a liability on its balance sheet – the US government will reportedly urge Congress to legislate that crypto service providers segregate client and corporate funds. Coinbase’s disclosure that customers’ assets may potentially form part of any bankruptcy estate, and that the customers may be treated as general unsecured creditors, caused a stir within the crypto industry as the implication was that if Coinbase were to go bankrupt, many of the assets it holds for customers may go with it. Despite this move to mandate segregation of client funds  from proprietary funds, the government still believes providers should be able to pool customers’ assets, allowing them to internally manage trades instead of processing each individual trade on the blockchain.
The European Central Bank (ECB) says that the increasing interconnectedness between cryptoassets and traditional markets means that contagion from cryptoassets pose a considerable risk to financial stability. The report, published as part of the central bank’s biannual financial stability review, warned that “cryptoasset markets currently show all the signs of an emerging financial stability risk.” Although such contagion has so far remained sufficiently small to prevent any financial stability risks being incurred, the ECB is eager to highlight that a point will soon be reached where this is no longer the case. The central bank advocates for regulators to monitor developments, stating that “any further steps that allow the traditional financial sector to increase its interconnectedness with the crypto-asset market space should be carefully weighed up, and priority should be given to avoiding financial stability risks.” The report consequently argues that to prevent such risks it is paramount for regulatory measures to be globally coordinated: “The challenges faced in monitoring financial stability risks from cryptoasset developments and interconnectedness with the traditional financial sector will persist as long as there are no standardised reporting or disclosure requirements.”
JP Morgan has reportedly been trialling the use of its own private blockchain for collateral settlement, conducting a pilot transaction involving the transfer of tokenised BlackRock money market fund shares.  The investment bank, which founded Onyx Digital Assets (ODA) in 2020, has long been an advocate for the use of blockchain technology, despite its more recent Damascene conversion on the value of cryptocurrencies. ODA is described as a “blockchain-based network that enables the processing, recording and Delivery-versus-Payment (DVP) exchange of digital assets across asset classes.” BNP Paribas recently completed its first trade on the ODA platform, becoming the first European bank to join the network. JP Morgan is also involved in the Monetary Authority of Singapore’s Project Guardian, a tokenisation pilot for DeFi transactions involving borrowing and lending on a public blockchain, while the investment bank participated in the USD 60 million Series C fundraising round for blockchain analytics firm Elliptic, and recently evaluated bitcoin’s fair price at USD 38,000 while declaring crypto to be its preferred alternative asset in a note issued to clients.

News Links

Basel Committee to Issue Second Consultation on Crypto (The Block)
Regulate Ledgers and Not Individual Crypto Providers, BIS Study Says (CoinDesk)
Financial Regulator Cautions UK Against Rushing to Create ‘Crypto Hub’ (Financial Times)
Portugal’s Parliament Rejects Crypto Tax Proposals Amidst Budget Negotiations (The Block)
German BaFin Official Calls for ‘Innovative’ EU-Wide DeFi Regulation (Cointelegraph)
Russian Finance Ministry Calls on Crypto for International Settlements (Beincrypto)
Russian Central Bank Signals Agreement with Crypto Law Revisions: Report (Cointelegraph)
Paraguayan Bill Regulating Crypto Mining and Trading Moves Closer to Law (CoinDesk)
Thailand Excludes Crypto Transfers from VAT Payments Until 2024 (The Block)
South Korean Legislature Considering New Licensing System for Crypto (Cointelegraph)
Korean Police Move to Freeze Luna Foundation Guard Assets: Report (CoinDesk)
OCC’s Hsu Reiterates “Careful and Cautious” Approach after Terra Collapse (The Block)
US Senators Lummis and Gillibrand Set to Propose Crypto Oversight Bill Next Month (CoinDesk)
Draft Bill to Ban China’s Digital Yuan from US App Stores (Cointelegraph)
CFTC Roundtable on FTX Proposal Highlights Barriers in Clearing of Digital vs Physical Assets (The Block)
Central African Republic to Launch Bitcoin, Crypto Hub (Bitcoin Magazine)
Binance to Advise on Crypto Strategy as Kazakhstan Looks to Boost Industry (CoinDesk)
CBA Presses Pause on Crypto Pilot (Finextra)
China’s State-Backed BSN Pushes New Public Blockchain Network Unlinked to Cryptocurrencies for International Markets (South China Morning Post)
Investment Platform Achieves World-First with Asset Management Recorded on Blockchain (Cointelegraph)
Online Broker FlatexDegiro Moves into Crypto with Boerse Stuttgart (Finextra)
Swiss Asset Manager Julius Baer Eyes Crypto and DeFi Potential (Cointelegraph)
SBI Invests in Digital Asset for ‘Smart Yen’ Joint Venture Project (Finextra)
Protego Trust Bank Targets $2 Billion Valuation After Quietly Raising $70 Million (The Block)
Digital Securities Platform ADDX Raises $58 Million (The Block)
Tether Launches Stablecoin Pegged to Pesos on Ethereum, Tron and Polygon (Cointelegraph)
US SEC Rejects One River Spot Bitcoin ETF Application (Blockchain News)
ARK and 21Shares Make Another Attempt at a Bitcoin ETF Approval (The Block)
Terra to Restart Luna Blockchain, Abandon UST Stablecoin (Pymnts)
ISDA: Crypto-Asset Risks and Hedging Analysis (Markets Media)
Ethereum Liquidations Top $157M After Merge Upgrade Test Hits Snag (Decrypt)
Crypto Funds Under Management Drop to a Low Not Seen Since July 2021 (Cointelegraph)
Key: Regulation             Technology            Ecosystem              Markets 

CBDC Corner

As discussed in this week’s article, G7 Finance Ministers and Central Bank Governors have issued a statement that highlights the opportunities and implications of CBDCs and their potential role in future payment transactions. The statement encourages “jurisdictions exploring CBDCs to examine the international dimensions of CBDCs, in particular their cross-border use. CBDCs with cross-border functionality may have the potential to spur innovation and open up new ways to meet users’ demand for more efficient international payments, but continued international cooperation will be important to understanding and minimising any negative spillovers to the international monetary and financial system.”
Bank of Japan CBDC Experiments: Results and Findings from PoC Phase 1 (Bank of Japan)
ECB’s Lagarde Says While Crypto Has No Worth, She Would Back Digital Euro: Politico (The Block)
IMF, Bank of France Officials Believe More CBCDs Will Emerge in Next Three to Five Years (The Block)
Fed’s Brainard Sees Case for Central Bank Digital Currency (Reuters)
US Fed Vice Chair Says Digital Dollar Would Take 5 Years to Launch (CoinDesk)
Fed’s Vice Chair Tells Banks: Digital Dollar Won’t Cut You Out (Pymnts)
Nahmii Selected to Build Norges Bank CBDC Sandbox (Norges Bank)
Mercado Bitcoin Partners with Stellar to Create MVP for Brazilian CBDC (Cointelegraph)
SWIFT in Cross Border CBDC Interoperability Trial with Cap Gemini (Ledger Insights)
Circle Tells Federal Reserve a CBDC ‘Could Destabilize’ Banking (Pymnts)

Thomas Murray Digital

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