IMF chief praises services provided by cryptocurrencies, but calls for stablecoins to be regulated

Despite the turmoil in the cryptocurrency market, she urges not to give up the ecosystem while pointing out the limits of certain stack coins.

Two weeks ago, the cryptocurrency and the stablecoin ecosystem were severely disrupted, causing many losses to users, but also questions about the resilience of such an ecosystem.

Some senior officials took the opportunity to express their concerns, such as Christine Lagarde, the head of the European Central Bank (ECB), who stated that cryptocurrencies “are worthless”.

Kristalina Georgieva, Head of the International Monetary Fund (IMF), for her part, has a more nuanced view of the world of cryptocurrencies.

“I beg you not to withdraw” from the crypto world, Kristalina Georgieva said on Tuesday at the annual meeting of the World Economic Forum in Davos. “It gives us all faster service, much lower costs and greater inclusion, but only if we separate the apples from the oranges and bananas,” she added, noting that the role of regulators was to educate about the different aspects of this ecosystem.

Some stack coins in the viewfinder

On the other hand, the latter takes a more critical look at the collapse of stablecoin usd (UST) in the Terra blockchain.

“When we look at stablecoins, this is where the big mess has happened. If a stablecoin is asset-backed, one-on-one, it is stable. When it is not asset-backed, but to be promised a 20% return is a pyramid. “(implied by Ponzi), said Kristalina Georgieva. “What happens to the pyramids? (…) They end up falling apart”. For the latter, in the face of this observation, it is necessary to regulate the stablecoin sector.

Kristalina Georgieva, refers to the Anchor protocol, which runs on the Terra blockchain, and which shows promises of returns of almost 20% when users deposit their stablecoin UST there. Anchor also acts as a lending platform, as it is possible to borrow UST stablecoin by providing security in cryptocurrency, similar to cryptocurrency luna. When UST and the cryptocurrency crashed, between May 7 and May 12, the latter saw $ 1.048 billion in liquidations.

A critical note from the ECB on Terra

The collapse of UST has actually warned many international regulators who want to move towards regulating stack coins. ECB Tuesday published a review on the crypto ecosystem, points the finger at the Terra ecosystem and calls for faster progress towards European regulation of the ecosystem.

Like we explain it here, a stablecoin (or stable cryptocurrency) is a cryptocurrency (or digital asset) linked to a fiat currency such as the euro or dollar. A stack coin can also be backed up by other assets (such as gold). This is called the underlying stablecoin. When the price of the underlying goes up or down, the value of the stablecoin must match it. The promise is to permanently keep the parity, for example 1 UST = 1 dollar. There are two main types of stablecoin:

  • The largest (so-called “classic”) stablecoins, which account for about 90% of stablecoin trading today, work like this: A company issuing the stablecoin (eg Tether for USDT) must guarantee to have equal as much in reserve as dollars than stablecoins in circulation. So if a client wants to sell his stack coins for dollars, there is definitely enough money in the coffers of this company to make this conversion. It is therefore a parity based on the stock of “real” money available to the stablecoin issuer.
  • Other stack coins, called “algorithmic”, work with reserves located in assets other than the underlying to which it is linked, such as digital assets. These algorithms must make it possible to maintain parity … At least in theory.

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