Lessons from the UST-luna disaster for crypto

Hello and welcome to Protocol Fintech. This Tuesday: Stablecoin Recovery, Crypto Sanctions, and Sam Bankman-Fried vs. Jack Dorsey.

out of the chain

“Just because you dreamed it doesn’t make it any less real.” No, it’s not Do Kwon trying to reassure American shoppers: it’s RuPaul, my muse, in his 2018 advice book, “GuRu.” Crypto investors might find words of consolation and common ground here. RuPaul first suggested tipping drag queens in bitcoin in 2013. Can we call her a girly adopter?

—Owen Thomas (E-mail | Twitter)

Can this stablecoin be saved?

For a brief moment on Monday, the UST appeared to rally. After dropping as low as a penny, the value of the stablecoin has risen again – to 12 cents. That won’t be enough: it’s still well below the $1 anchor that the UST was meant to hold. Meanwhile, its sister cryptocurrency luna has somehow fallen further, for two hundredths of a hundred.

An effort to rescue the embattled token appears to be going nowhere, marking the biggest implosion in the crypto crash of 2022. Even Do Kwon, the co-founder of Terraform Labs, looks set to ditch the UST — though he still guards, improbably, hopes for Luna.

The reserves are exhausted. The Luna Foundation Guard, the non-profit organization started by Kwon to support Luna and UST, squandered the bitcoin reserves it had built up.

  • LFG said on Monday it was short of bitcoin after frantically trading the cryptocurrency for UST and performing other maneuvers to defend the dollar peg. From over 80,000 bitcoins in early May, he had only 313 left.
  • The foundation said it hopes “to use its remaining assets to compensate the remaining users of the UST, the smallest holders first.” Kwon also offered to essentially drop the UST. The Terra blockchain on which UST and luna operated, it said in a tweet“should be forked into a new chain without algorithmic stablecoins”.
  • He urged Terra developers to support the new fork, saying Terra “is my family. I will always be here no matter how hard it gets.

The fallout for other stablecoins is still ongoing. Circle CEO, Jeremy Allaire, whose firm backs stablecoin rival USDC, said UST was “literally a ticking time bomb.” Many in the industry think it’s too late to save it.

  • The fall of the UST shone a spotlight on stablecoins that use algorithms to dynamically control the supply of tokens to maintain a fixed price. USDC and Tether, on the other hand, maintain monetary reserves to prop up their pegs.
  • There was “curiosity” around algorithmic stablecoins, Allaire said, but the industry is now falling back on “what we understand, which is these full-reserve models, backed by trust funds, like the USDC.”
  • Other crypto leaders suggest that Kwon’s efforts to salvage something from the UST just aren’t worth it. “Failures can/will happen”, Changpeng Zhao, CEO of Binance said in a tweet. Binance lost $1.6 billion on paper from the UST it received as part of an early investment in Terraform Labs, and Zhao said Binance would not try to recover anything.

Maybe failure should be an option. The UST crash could have actually revealed “a new discovery [sic] resilience” in the crypto market, Zhao supported. Even some stablecoin critics agreed. Bill Nelson, chief economist at the Bank Policy Institute, said if “it all works out in a matter of days,” crypto advocates could argue that this shows how a crypto ecosystem “could safely implode.” It is a Darwinian vision of the market. But if failures are what it takes for crypto to scale, so be it.

—Benjamin Pimentel (E-mail | Twitter)

A MESSAGE FROM RIPPLE

Ripple harnesses the power of cryptocurrency and blockchain to help businesses in the United States and beyond innovate and grow. Find out how we provide game-changing crypto solutions for businesses in the United States and around the world.

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on the money

On protocol: The first case of crypto sanctions enforcement has emerged, and a DC magistrate is reveling in the proof he offers that digital assets aren’t as anonymous as some might think.

Cannabis banking is still problematic, but lawmakers could act this year. The are in different ways Congress could resolve the tension between state-level legalization and the federal ban on disentangling financial services for the sector.

Portugal is considering imposing capital gains taxes on crypto. the reduced tax treatment of crypto as a currency had made the country a kind of tax haven.

Also on Protocol: Everything you need to know about crypto crash.

MiamiCoin’s price has crashed and there is still no real use for the city-bound token. There is also concerns that the city’s crypto-friendly mayor, Francis Suarez, may have circumvented securities rules by promoting cryptocurrency.

Heard

Sam Bankman Fried scorned bitcoin in an interview with the FT, and Jack Dorsey was not happy. the FTX CEO said bitcoins was useful as a store of value, not for payments, and the Block head and rated maxi bitcoin asked him why he didn’t bring up the Lightning Payments Network.

Adrian Harrissuperintendent of the New York State Department of Financial Services, wants to be careful in regulating fintech that expands access to the underbanked. “There is a need for cash for underserved communities,” she told PYMNTS.com. We want to be careful to use a scalpel and not a hatchet.

Deal flow

The Flow Blockchain has raised an ecosystem fund of $725 million. Dapper Labs created the blockchain, which powers Dapper’s NBA Top Shot, NFL All Day, and UFC Strike NFT marketplaces, in addition to other Web3 applications. A16z, Coatue, Liberty City Ventures and Dapper Ventures have all backed the fund.

Solidus Labs raised an additional $45 million. The crypto asset watchdog says Series B funding will help it attract traditional financial institutions looking to expand into DeFi. Its investors include Liberty City Ventures, Evolution Equity Partners, Declaration Partners and angel investors Brian Brooks and Christopher Giancarlo.

Paddle has raised $200m in Series D funding. The London-based payments infrastructure company has now reached a valuation of $1.4 billion, with investors including Notion Capital, Kindred Capital and KKR.

Paymob raised $50 million in a Series B round. PayPal Ventures, Kora Capital and Clay Point led the round, bringing the Cairo payments startup’s total to $68.5 million.

Co:Create has raised $25 million in seed funding. A16z led the transaction in remote-based striker NFT, joined by VaynerFund, Not Boring Capital and Amy Wu.

A MESSAGE FROM RIPPLE

Ripple is a crypto solutions company committed to sustainability – for our business, the crypto industry, and the planet. We are on track to achieve zero carbon by 2030 or sooner, while our payment solution runs on a carbon neutral blockchain today. Find out how we are helping to deliver a low-carbon future for encryption.

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Thanks for reading – see you tomorrow!

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