The collapse of UST could bring central banks closer to a CBDC

The collapse of UST could bring central banks closer to a CBDC

TerraUSD's ongoing collapse could be the final push central bankers need to think more seriously about launching a central bank digital currency, some industry experts say.

According to CoinGecko, UST plunged dramatically last week after a weekend depegging from its targeted $1 strike price triggered a downward spiral to a low of $0.126 early Monday. The token's neighboring cryptocurrency, LUNA, fell from $86 last week to almost $0 at the time of publication.

Some industry representatives predict that the conversation could soon shift to the need for a reliable, government-run CBDC.

“There is a demand for digital money, whether in the form of stablecoins or in the form of a central bank-issued instrument,” said Jonathan Dharmapalan, CEO of eCurrency, which provides technology for central banks to issue and distribute CBDCs.

“Accelerating our efforts to have a truly stable U.S. dollar... I think that’s a conversation that needs to be on the table.”

The situation has accelerated the debate over stablecoin policy and regulation in the US. US Treasury Secretary Janet Yellen has doubled down on her request for Congress to create a policy on who can issue stablecoins.

“There's been a lot of talk about stablecoin regulation and we haven't landed on what will become law yet,” Dharmapalan said. "Then if it becomes law, who will regulate stablecoins? Is it the people who regulate banks, will it be the people who regulate securities? There is a debate about which entity becomes a regulator for stablecoins."

Lawmakers on the Hill have signaled the need for a better understanding of what a CBDC might look like in the U.S., Kristin Smith, executive director of the Blockchain Association called.

“I think [the UST situation] is certainly a factor that will factor into future debates about CBDCs, but I still think the challenge with CBDCs is that there are still a lot of questions about what the design might look like,” Smith said. “Then it’s just a question of how long it would take for a decision to be made and the technology to be deployed.”

The Treasury Department will issue a “comprehensive report” on cryptocurrencies and stablecoins “shortly,” Yellen said last week as part of a request from the President’s Working Group on Financial Markets (PWG). She also emphasized that Congress should also work on stablecoin legislation, saying it is “highly appropriate” for this to be done by the end of 2022. Still, concrete policy is likely still a long way off, Smith said.

“I still think this will take many, many years, and I think we will have a very mature stablecoin market by then,” Smith said.

“Our financial services system will look significantly different than it does today and so by the time we reach that point the need for a system may no longer be as acute.”

Additionally, other industry experts said that a CBDC is not interchangeable with a stablecoin and the two types of digital currency play different roles.

“The main advantage of stablecoins is the wide reach, user base and solid reputation of traditional financial institutions,” said Anton Chashchin, managing partner of Bitfrost.io.“I believe that algorithmic stablecoins do not need to be included in the CBDC system. As the recent UST case demonstrated, there are still significant risks that need to be addressed and resolved.”

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UST’s post-collapse could drive central banks closer to a CBDC is not financial advice.