Chinese Economists Warn of Stablecoin Risks After UST Collapse

Chinese economists have recently drawn attention to the risks associated with stablecoins, using the collapse of the TerraUSD (UST) stablecoin as a cautionary tale. These experts have underscored that the stability of stablecoins is not assured and that they can be subject to significant volatility and risk. The UST collapse, which was once one of the largest stablecoins by market capitalization, serves as a stark reminder of the potential dangers inherent in these digital assets.

The UST collapse was triggered by a liquidity crisis, which led to a rapid de-pegging from the US dollar. The stablecoin's algorithmic design, which relied on a complex system of incentives and arbitrage opportunities, proved to be insufficient to maintain its peg during a period of market stress. As a result, UST's value plummeted, causing significant losses for investors and destabilizing the broader cryptocurrency market.

Chinese financial experts have demystified stablecoins, emphasizing their ties to traditional monetary systems. Zou Chuanwei highlighted that stablecoins replicate existing bank deposits and invest in low-risk assets like U.S. bonds, rather than creating new currency. He stated, "The mainstream model of stablecoins did not create new currencies, but simply tokenized bank deposits and invested reserve assets in low-risk assets such as US bonds. The essence is the 'blockchain translation' of the existing monetary system."

Zhao Binghao pointed out potential instability, stating that in extreme market conditions, stablecoin value could drop significantly as seen in the UST collapse. They argue that compliance with reserves is crucial, challenging stablecoins' perceived sovereignty resistance. Zhao added, "The stability of stablecoins depends on the reserve assets of the issuer. In extreme market environments, the value of stablecoins may even return to zero, and the collapse of UST is a typical example."

Market responses were varied, with consistent discussions stressing the need for robust reserve models. Statements from these experts follow a broader regulatory discourse on ensuring transparency and adequate backing for stablecoins, reflecting recent emphasis on reserve scrutiny. The collapse of UST has raised questions about the future of stablecoins and their role in the broader financial system. While stablecoins offer the potential for faster and cheaper cross-border payments, they also present significant risks that must be carefully managed.

As the market for stablecoins continues to evolve, it will be important for regulators and industry participants to work together to address these risks and ensure the stability and integrity of the financial system. The detailed examination by Chinese financial experts underscores stablecoins' limitations in monetary innovation and risk under extreme market conditions, evidenced by UST's collapse. The collapse of UST has underscored the need for robust reserve backing and has reshaped regulatory approaches, emphasizing the importance of solid reserve backing for stablecoins.