Fitch Ratings, a US credit rating agency, predicts that the collapse of the Terra (LUNA) project and the stablecoin Terra USD (UST) will accelerate regulations in the crypto sector, which are likely to become more stringent.
As one of the top three credit rating agencies in the US, Fitch said the failure of the UST highlighted the vulnerability of stablecoins pegged to independently issued US dollars.
The LUNA cryptocurrency price which last month had a market cap of over US$42 billion is now worth less than US$0.0001 per LUNA, which continues to move lower.
The collapse of LUNA caused cryptocurrency exchange Binance to revoke its LUNA-based perpetual margin contract. A number of other crypto exchanges are doing the same.
LUNA's supply has increased 20 times in just four days, so that it swells to 7.1 billion tokens. With a current market cap of only US$49 million, LUNA is no longer in the top 10 of the biggest cryptocurrencies as it was before.
In fact, LUNA is not in the top 1000 cryptocurrencies and is currently ranked number 1063 crypto asset by market cap, according to CoinGecko data.
The exponential growth of LUNA supply is expected to be a positive thing for UST. Nevertheless, the stablecoin that has slumped is still far from the benchmark value of US$1.
After experiencing a brief rally back to US$0.83, UST has now slumped further down and reached a price of US$0.17 which made people shake their heads.
On Thursday (12/05/2022), US Treasury Secretary Janet Yellen emphasized concerns about Terra. He said the failure of the UST stablecoin was a clear demonstration of the risks associated with stablecoins.
In December, Fitch reported that algorithmic stablecoins such as UST face unique and untested structural challenges. In addition, stablecoins of this class have difficulty getting approval from regulators.
The report was proven correct when the reserve fund prepared by the Luna Foundation Guard (LFG) to maintain the value of UST was not sufficient to become a source of stability when the UST algorithmic benchmark mechanism was hit by speculative pressure.
After the collapse of UST, Dai (DAI) became the largest decentralized stablecoin with a market capitalization of US$6.2 billion. Nonetheless, DAI is a partially centralized stablecoin as Circle's USD Coin (USDC) is the number one collateral for DAI.