The UK is preparing to lasso the crypto bull, with a sweeping new regulatory regime. Though welcome, this comes too late to stop manifold retail investors from being trampled by the FTX collapse.Stablecoins, typically pegged at one dollar, deserve particular focus. These are often treated as safer crypto. The collapse of a $9bn deal between Bob Diamond’s Spac and Circle, which operates the second largest stablecoin, USD Coin, raises questions as to whether that safety exists.Circle has positioned USDC as the transparent option in a $140bn market where questions over the reserves backing the tokens in circulation have been rife. Its public filings reveal a breakdown of the $44bn in cash and treasuries it holds.Stablecoins can be more than just an on-ramp to the crypto casino claims Circle. USDC was used to send aid to Venezuelans while Visa and Mastercard have trialled it as a means to settle transactions. In happier times, FTX said it paid a large proportion of its team in USDC.But fintechs such as Wise and Remitly have already slashed the costs for cross-border remittances, without the need for a synthetic dollar. And since stablecoins are primarily used for cryptocurrency trading, their operators’ fortunes depend heavily upon this cowboy market. The value of USDC in circulation has contracted from more than $55bn in June to $43bn today following FTX’s collapse.Stablecoins have also often failed to live up to their name. Analysts at JPMorgan found that the four largest coins routinely broke the buck, trading below par 25-40 per cent of the time between April and July 2021. This May, the $65bn juggernaut of Tether lost its $1 peg, briefly falling as low as 95.11 cents after the collapse of TerraUSD, an $18bn stablecoin which relied on algorithms to keep it steady.Much of the focus on stablecoins in recent years has been on improving disclosure. Regulation can improve that, but will not solve the bigger problem. As the FTX contagion ripples on, it is hard to argue that any coin connected to cryptocurrency can sell itself as stable.Our popular newsletter for premium subscribers is published twice weekly. On Wednesday we analyse a hot topic from a world financial centre. On Friday we dissect the week’s big themes. Please sign up here.
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