Stablecoins Are Not Stable Unless They are Backed by Assets. Here’s Why

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The spectacular collapse of algorithmic stablecoin TerraUSD (UST), and a sister stablecoin LUNA, have shocked the crypto market. The collapse had affected the largest cryptocurrency bitcoin as well, hence this negative impact had made people completely pull out of the crypto market. Reacting to this, the managing director of IMF requested to not pull out of crypto completely with this collapse. 

In the World Economic Forum’s annual meeting in Davos held on Monday, Kristalina Goergieva, the managing director of the International Monetary Fund addressing cryptocurrency, requested people not to completely evade crypto. 

The IMF director’s statement recorded by Bloomeberg said: “I would beg you not to pull out the importance of this world. It offers us all faster service, much lower costs, and more inclusion, but only if we separate apples from oranges and bananas.”

Kristalina also pointed out that, instead of avoiding the cryptocurrency completely, the regulators worldwide must put up protective measures and adequately educate investors on the risk factors associated with virtual assets. As there are many different types of crypto assets that vary with the risk levels too. She also stressed the difference between the stable coins backed by cash and algorithmic stablecoins, like LUNA. 

She said: “The less there is backing it, the more you should be prepared to take the risk of this thing blowing up in your face.” 

Kristalina Georgieva during the panel discussion on stablecoins reviewed by CNBC in Davos Monday expressed the opinion that the stablecoins fell into pieces because they were standing alone and were not backed by any assets. Quoting:

“When we look at stablecoins, this is the area where the bid mess happened. If a stablecoin is backed with assets, one to one, it is stable.” Elaborating on this she said: “When it is not backed with assets, but it is promised to deliver a 20% return, it’s a pyramid, what happens to pyramids?, they eventually fall to pieces.”