2022-05-09

Cyptopocalypse: Down Go the Stablecoins

Back in 2018 there was a hullaballoo around Tether: Did Unbacked Tether Creation Manipulate Bitcoin Prices?. I wrote then (lots of details in the post if you're unfamiliar with the claim):
If this is true, it could deal a significant propaganda blow to the cryptocurrency market because one of the selling points is the deflationary, anti-bank qualities of a purely digital fiat currency. The real loser may not be cryptocurrencies however, but the exchanges. The current exchanges are a vulnerability for cryptocurrencies and a step backwards, introducing counter-party and cyber-security risk. ...The greater irony is that if this is all true, what happened to Bitcoin is happening to the entire global economy in real time. The Chinese yuan is to eurodollars as Bitcoin is to Tether.
I daresay BTC would be doomed to a guaranteed drop of 95 to 100 percent if it turns out the price is propped up by credit inflation via stablecoin because the whole rationale behind BTC has become its "digital gold" properties. While those would technically still exist, the fact that the price could be manipulated by credit inflation would make it less attractive than gold. The narrative would be destroyed.

With no central bank or government backing of any import, a stablecoin fiasco would reveal cryptos are not like digital gold, but more like wildcat banking of the 1840s.

Wildcat banking refers to the practices of banks chartered under state law during the periods of non-federally regulated state banking between 1816 and 1863 in the United States, also known as the Free Banking Era. This era, commonly described as an example of free banking, was not a period of true free banking, as banks were free of only federal regulation; banking was regulated by the states. The actual regulation of banking during this period varied from state to state.

According to some sources, the term came from a bank in Michigan that issued private paper currency with the image of a wildcat. After the bank failed, poorly backed bank notes became known as wildcat currency, and the banks that issued them as wildcat banks.[1] However, according to others, wildcat meant a rash speculator as early as 1812, and by 1838 had been extended to any risky business venture.[2] A common conception of the wildcat bank in Westerns and like stories was of a bank that left its safe somewhat ajar for depositors to see, in which the banker would display a barrel full of nails, grain or flour with a thin sprinkling of cash on top, thus fooling depositors into thinking it was a successful bank.

The traditional view of wildcat banks describes them as distributing nearly worthless currency backed by questionable security (such as mortgages and bonds). These actions ended when note circulation by state banks was stopped after the passage of the National Bank Act of 1863. Mark Twain, in his autobiography, refers to the use of such currency in 1853, "The firm paid my wages in wildcat money at its face value".

Coindesk: UST Stablecoin Loses Dollar Peg for Second Time in 48 Hours, LUNA Market Cap Falls Below UST's

TerraUSD (UST) has lost its dollar peg for the second time in three days, falling to as low as $0.65 on Monday, according to the most recent price estimates from CoinMarketCap.

As UST has "depegged," the price of LUNA, its sister token, has dropped over 44% to $35 in the past 24 hours according to CoinMarketCap.

UST, a so-called algorithmic stablecoin, works with LUNA to maintain a price of $1 using a set of on-chain mint and burn mechanics. In theory, these mechanics work to ensure traders can always swap $1 worth of UST for $1 worth of Luna, which has a floating price and is meant to serve as a kind of shock absorber for UST's price.

Luna's price decline puts its market cap below that of UST's. That potentially throws the foundation of UST's entire stabilizing mechanism into jeopardy, because it means a Terra bank run could lead to some users no longer being able to redeem their $1 of UST for $1 of LUNA.

...Today’s depeg comes after the Luna Foundation Guard (LFG) announced Sunday night that $1.5 billion of its massive bitcoin reserves would be “loaned” out to professional market makers to proactively defend UST’s dollar peg.

My gut tells me this is all a giant Ponzi at worst and a giant case of fractional reserve lending at best. Money market funds "broke the buck" in 2008 and the financial system almost crashed. This is like the dark days of September 2008. If you forget what was going on at the time:
I do believe 2008 was hyped as a crisis, as are all crises, but the question for crypto is, why wouldn't the government hype this too? Why would they stop a run on the crypto exchanges and stablecoins? I think they'd fan the flames to burn the competition to the ground.

How much of the system is backed by BTC that can itself collapse? I'm not worried about a single stablecoin going down, I'm worried about a systemic run on the entire industry if BTC is propping up multiple stable coins (as I suspect is the case with Tether).

We have never witnessed a sustained bear market and recession in the age of crypto. The last honest-to-God bear market was about 40 years ago. Every one has been bailed out. If inflation stays high though, the Fed's hands will be tied. It won't matter even if they try to help. Lending rates will keep rising, meaning debtors who need capital will go bust if they cannot finance those ever rising rates of interest. If they're backing their own assets with BTC...there's no central bank issuing BTC to stop the collapse the way the Fed can issue more FRNs to banks...and while they probably could bail it out if they wanted to, I'd bet USG would rather see all the private cryptos fail and then unveil the central bank digital currency or US Treasury Coin. Update: Here's UST/USDT

And Thai baht.

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