According to the IMF’s senior official, people should consider the differences when investing in stablecoins backed by hard currencies like the dollar and those like TerraUSD who are dependent on a sister token.
Importance of The Crypto World
According to the managing director of the International Monetary Fund (IMF), Kristalina Georgieva, investors should continue supporting stablecoins despite the recent collapse of the TerraUSD (UST) stablecoin and its sister token LUNA.
At the World Economic Forum’s annual meeting in Davos on Monday, Georgieva urged traders not to ignore the importance of the crypto sector and what it has to offer. She went on to provide a few benefits including faster transactions, relatively low fees, and more inclusion, but only if “apples, oranges, and bananas” are separated. The IMF’s chief believes that it is the global regulators that should be responsible for introducing essential education to safeguard investors.
Georgieva further discussed the differences between fiat-backed stablecoins and so-called algorithmic stablecoins like TerraUSD. “The less there is backing it, the more you should be prepared to risk this thing blowing up in your face,” she remarked. Singapore-based Terraform Labs, created the UST stablecoin in 2018 and incorporated algorithms to assist it to retain its advertised 1:1 value to the greenback. Terra’s main attraction was the Anchor lending protocol, which, before it collapsed, guaranteed lenders yearly percentage earnings of up to 20%.
Terra Compared to Pyramid
The Anchor lending protocol, however, hit a downward spiral on May 8th, as UST suddenly lost its dollar peg. The once-popular stablecoin dropped below $0.15 before reaching an all-time low of $0.521 on Tuesday, as per data provided by CoinMarketCap.
Formerly a top-10 coin by market valuations, LUNA dropped 100% to a fraction of a cent after the UST spiraled. During this time, stablecoins together with the entire crypto market saw a steep decline. “When we look at stablecoins, this is the area where the big mess happened,” Georgieva said, as cited by CNBC. She further explained that a stablecoin is only stable if it is backed 1:1 by actual assets. “When it is not backed with assets, but it is promised to deliver 20% return, it’s a pyramid,” said Georgieva. “What happens to pyramids? … They eventually fall to pieces.”
Kristalina Georgieva’s comments came soon after Christine Lagarde, head of the European Central Bank, stated that cryptocurrencies are worthless and have “no underlying asset to act as an anchor of safety.”