Stablecoins have started to fluctuate in their value

Stablecoins have started to look uncertain in their value. Major stablecoins swung between $0.95 and $1.02 last week, according to data provider Coinmarketcap, after having maintained their peg to within a cent previously in 2022.

Stablecoins are the closest that the market will get in the crypto space to a systemically important asset and any impact on the value of one or several stablecoins is liable to impact the system as a whole, Hagen Rooke, financial regulation partner, Reed Smith, Singapore. “As things stand, stablecoins are very lightly regulated, which is strange because if you break down how a centralised stablecoin works, it is basically the same as a bank deposit,” he added.

As per Coinmarketcap,Tether, USDC and others lost their prized pegs to the dollar last week in a bout of market disorder that shook faith in these coins that were designed to sidestep crypto volatility. Both Tether and USDC experienced less publicised bouts of volatility in previous years, at times rising to as much as $1.01 in 2021 and falling to around 97 cents in 2020.

For Morgan Stanley, last week was the most volatile in the history of this class of cryptocurrency.

Stablecoins are pegged to the value of mainstream assets such as the dollar to boost confidence, and are the main medium for moving funds between cryptocurrencies or into regular cash.

“The economy is completely shifting to being internet-based and always on, but the financial system isn’t. So you need a stablecoin to have the dollars that can move at the speed of the economy, of the fastest parts of the economy,” Chad Cascarilla, CEO, Paxos, said.

The market turmoil last week was triggered by the collapse of TerraUSD, an outlier because its peg to the dollar was supposed to be maintained by an algorithmically driven mechanism rather than by reserves of dollars or other assets, as is typical for stablecoins. TerraUSD’s woes contributed to a slide in crypto markets that saw over $357 billion or 21.7% of digital asset market capitalisation wiped out week-on-week, according to research from Kraken.

Tether’s market value has declined to $75.6 billion from $83 billion last Monday, before the dollar decoupling, while that of USDC has climbed to $51 billion from $48 billion, according to Coinmarketcap.

“There’s confidence with USDC because of the likes of the institutions that are holding USDC reserves for them, such as BlackRock for example,” Marcus Sotiriou, analyst, GlobalBlock, said.

Meanwhile Rooke and others see more regulations on the way.

(With inputs from Reuters)