Global Crypto Market

What are UST & Luna and why the fall of 2 ‘stablecoins’ led to a crypto crash in India – ThePrint




New Delhi: On 5 May, the crypto asset TerraUSD — also known as UST — was trading at $80 (around Rs 6,207) a coin. On 7 May, UST, pegged against the US dollar, started falling on all crypto platforms across the globe. On 9 May, its value had fallen to 35 cents after a massive sell-off. Luna, another crypto coin that also backs UST (by buying into it if needed), lost all its value and fell to almost zero.
UST investors lost almost $45 billion in just a matter of days. This sell-off in one coin triggered a broad sell-off in the crypto market globally and investors started pulling out their money from crypto assets and parking their money in safer ones, like gold.
Repercussions of the UST-Luna crisis were also felt in the crypto market in India. Three major (in terms of transaction volumes) crypto trading platforms in the country — WazirX, CoinDCX and CoinSwitch Kuber — also delisted the stressed coins (UST and Luna) from their platforms.
While there are no official estimates of the size of the crypto market in India, various private estimates suggest that there are 2 crore investors of crypto assets in the country, with a total investment of about $10 billion. According to CoinMarketCap, the total market capitalisation of the crypto is $1.2 trillion globally.
The UST-Luna crisis, along with geopolitical tensions owing to Russia’s invasion of Ukraine — leading to supply chain disruptions — and the Indian government introducing transaction tax and capital gains tax on virtual digital assets, have led to the market for crypto assets in the country falling in the past one month.
ThePrint explains the meaning of stable and unstable crypto coins, how the crypto market works and the recent ‘crypto crash’.
Also read: Ukrainian volunteers crowdfund $4 million in crypto to aid military against Russia
In the past few years, unusually high returns generated by crypto assets such as Bitcoin, have compelled investors to put their money in virtual digital assets and recognise them as an asset class. However, one also recognises the underlying volatility of these assets, since the crypto market is currently unregulated globally.
To avoid the volatility risk, there are ‘stablecoins’, which have an underlying value and are usually pegged against currencies. The value of ‘stablecoins’ like Tether does not fluctuate as much as the other cryptos, such as Bitcoin or Ether. The value of these coins is usually pegged at the collateral that backs them, like the US dollar. These coins can also be backed by other crypto assets, like how UST is backed by Luna.
‘Unstable’ coins are the opposite of this, which means they are highly volatile.
Terra is a public blockchain platform — which help companies build infra for apps on which people trade — that has two stablecoins, UST and Luna, in which the public can invest their money. At any given point, the value of UST is pegged to $1. This Terra manages by buying and selling of these two coins in the different markets to ensure that if UST falls that Luna can back it.
For example, if foreign investors start selling rupee, the Reserve Bank of India (RBI) intervenes in the market to contain the volatility by selling dollars, ensuring the value of rupee does not fall too much.
Through this arbitrage, Terra was able to keep the price of UST pegged to a dollar, while it earned profits through Luna, and also didn’t have to keep a reserve of US dollars at all times. There are algorithms that are in-built to the platform that tracks demand and supply of UST and Luna and are designed to balance the two systems.
This system fell apart in May, when large investors of UST and Luna started selling these stocks, which led to huge drops in their prices. Terra announced that they will build reserves of Bitcoin, another cryptocurrency, to balance the system — by using it to buy more Luna and UST, to control their falling prices. However, it did not work.
Along with the crash of UST and Luna, the Indian market for crypto assets is also reeling under the strict control imposed by the government, with the imposition of Tax Deduction at Source (TDS) on every crypto transaction — buying or selling of securities. The government has also imposed a 30 per cent tax on capital gains made by selling virtual digital assets like these coins.
“The Indian exchanges are KYC compliant and ensure that the transactions are secure and the traders are protected against any security threat,” says Nischal Shetty, co-founder and chief executive officer at WazirX. “However, due to current taxation laws, there is a possibility for them to shift their capital to unregulated or decentralised P2P (peer to peer) or foreign exchanges. This could become a challenge not only for the exchanges but also for the government to get revenue from taxes.”
Some of the big crypto assets traded in the Indian market include Ethereum (ETH), Binance (BNB), XRP, Solana (SOL), Cardano (ADA), Terra (Luna) and Bitcoin (BTC) — which is the dominant player. These coins or tokens have lost almost 30-60 per cent of their value in the past one month, according to CoinMarketCap data.
Gaurav Mehta, founder of Catax, a crypto and blockchain audit platform, says, “The Indian government is building an infrastructure to tap into the sources of crypto investments and track investors’ cost of acquisition of these crypto assets. This has created a fear among investors.”
“Consumers are unwilling to put their money in risky assets,” he added.
According to Shetty, the major dip that is being witnessed in crypto is a global phenomenon. “It can be primarily attributed to developments in the macro-environment such as increasing inflation, raising of interest rates by the Federal Reserve, the Russia-Ukraine war, etc,” he says.
He adds that the crypto markets are mirroring the traditional financial markets as both are seeing a correction. “It indicates that the crypto markets are attaining maturity — just like other markets, crypto also has a bear and bull run and, at present, we are going through a bearish phase.”
Shetty says there is a need to regulate the crypto market just like any other financial industry, but the Cryptocurrency and Regulation of Official Digital Currency Bill, proposed by the government last year, could reduce investor participation in its current form.
“There is a need to regulate crypto, and we have been voicing that for some time now. In alignment with the regulation of any other financial industry, crypto assets regulation, including taxation, would be a prerequisite for the industry to flourish. However, the current bill lays down parameters that could reduce participation and increase inefficiencies instead of encouraging more people to join the bandwagon,” he says.
Last year, the Narendra Modi government had listed the Cryptocurrency and Regulation of Official Digital Currency Bill in Lok Sabha for the winter session of Parliament. The bill aimed to ban all cryptocurrencies as a payment method in India, barring a few private coins to promote underlying technologies. The bill, however, allowed the Reserve Bank of India to set up an official digital currency.
The government later clarified that the bill would not be taken up in the winter session.
In January, Prime Minister Modi called for synchronised global action to regulate crypto assets. While addressing the World Economic Forum, Modi said that steps taken by one country to regulate cryptocurrencies may not be sufficient, given the kind of technology involved.
Earlier this week, the leaders of the group of seven nations or G7 — an intergovernmental panel comprising UK, USA, Canada, Japan, Germany, France and Italy, plus the European Union — called for a comprehensive regulation of cryptocurrencies, following the turmoil over the demise of the Terra (UST and Luna) stablecoins last week.
(Edited by Poulomi Banerjee)
Also read: Stock market turmoil, crypto craze proof of human ‘fear, greed’ says chief economic advisor
 
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