The collapse of the TerraUSD stablecoin could be a good thing

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The collapse of the TerraUSD stablecoin could be a good thing

While bitcoin unstoppably set new records, and a bunch of hastily created cryptocurrencies and projects generously rewarded the interest of their fans, only a few masochists desperately defied the euphoria and invoked logic, questioning the sustainability of the upward trend.

Relentlessly calling out crypto evangelists, critics pointed the finger at the flaws of the ecosystem that had metastasized across virtual expanses to unimaginable proportions. And they knowingly exposed themselves to the mockery and insults of die-hard cryptocurrency devotees.

Without the active role of the regulator

In one of the more striking verbal duels, economist Frances Coppola problematized various aspects of the monstrous mechanism of algorithmic stablecoins, warning that it is "difficult to stop the stampede of panicked speculators"

"I don't debate with the poor on Twitter, and I'm sorry, I don't have a dime at the moment," read the reply signed by Do Kwon, the architect of the TerraUSD stablecoin, in June of last year. Not even a year later, Do Kwon suddenly revealed his humbler side – crypto fell into a deep crisis, and the stablecoin in question imploded.

The man has better things to do today than reviving a failed crypto coin, while trying to answer specific questions from Korean investigators (and accusations of embezzlement of tens of millions of dollars). Frances Coppola fully justified the name of her profile on Twitter (Frances Schadenfreude Cassandra), but where were the competent institutions during that time? "How could it happen that the crypto bubble became a phenomenon worth almost three trillion dollars?" asks Paul Krugman.

And where were the regulators hiding, while Molly White, Nouriel Roubini, Ben McKenzie, Jim Chanos, Stephen Diehl and a handful of the bravest questioned the dogmas propagated by the messengers of the crypto cult? The shortest answer would be – opportunely waiting for a suitable moment.

In the vicious circle of crypto, no one cared too much about the problems that boiled under the surface as long as risky speculation offered solid returns, although high returns imply high risk - this is one of the key axioms of finance.

Without regulators to reduce the risk to acceptable limits, and without a central bank that acts as a last (safe) refuge in crisis situations, the story began to fall apart like a tower of cards, with devastating consequences of the domino effect.

And then the regulators appeared. In his column, Krugman highlights the recent speech of Lael Brainard, who made a clear distinction between "responsible innovation and regulatory evasion" After declaiming a whole series of problematic aspects of the cryptocurrency system, Brainard focused on the now well-known risks that have largely emerged as the result of restraint and lenient attitudes of regulators.

And the ice was broken by Fabio Panetta, a member of the board of directors of the European Central Bank, who shortly before Brainard was to take up his new position, lashed out at the proponents of crypto currencies in not very choice words, talking about the "gold rush beyond state control" and the pyramid scheme in which intense price growth fueled the influx of fresh capital.

And so in a circle, like a hamster in a cage or Kutla on a (fictitious) bicycle, until the economic crisis knocked on the door. The awakening of the regulator is perhaps most vividly demonstrated by the Bank for International Settlements' (BIS) annual review of current events, in which a notable space is dedicated to cryptocurrencies.

At the very beginning, the authors talk about creative innovations in the segment of money and payment transactions, but in their vision there is no place for cryptocurrencies because, as they state, "contrary to the decentralization narrative, the crypto universe rests on unregulated intermediaries who represent a serious financial risk"