Cryptocurrencies collapse after 'Black Wednesday' for blockchain

Instability plagues so-called 'stablecoins' with almost $200bn knocked off all crypto

On Wednesday, the Financial Conduct Authority warned that cryptocurrency owners enjoy no legal protections Credit: RUNGROJ YONGRIT/EPA-EFE/Shutterstock

Cryptocurrency owners are rushing to withdraw their funds amid a historic market panic that has been likened to a run on banks.

The value of so-called “stablecoins”, cryptocurrencies whose values are meant to be pegged to real-world currencies such as the dollar, have slumped as owners lose confidence in them.

Terra, whose value is meant to be propped up by software, has fallen from $1 on Monday to around 50 cents, while Tether, the world’s best-known stablecoin, fell to as low as 95 cents on Wednesday, the first time in years it has lost its “peg” to the dollar.

Luna, a non-stablecoin cryptocurrency that is designed to support the value of Terra, has fallen by 96pc in the last 24 hours.

The crash has raised concerns about the very concept of stablecoins, which are designed to be a safe haven for cryptocurrency owners against the whipsawing price of digital assets such as Bitcoin.

The panic has spread into more established cryptocurrencies. Bitcoin fell 10pc in 24 hours to under $27,000, an 18-month low, while Ethereum saw a similar drop.

Almost $200bn has been knocked off the value of all the cryptocurrencies in circulation in the last day, according to CoinMarketCap, which tracks prices.

Binance, the world’s biggest cryptocurrency exchange, said it was being forced to suspend withdrawals of certain currencies.

On Wednesday, the Financial Conduct Authority warned that cryptocurrency owners enjoy no legal protections.

“There are no consumer protections for those who buy any cryptoassets and NFTs, and they are not FSCS [Financial Services Compensation Scheme] protected. As a result, if you buy cryptoassets you should be prepared to lose all the money you invest,” it said.

Ministers have outlined plans to legislate to allow the use of stablecoins as a form of payment. The Treasury said on Thursday it would apply strict standards to such coins.

A spokesman said: “The Government has been clear that certain stablecoins are not suitable for payment purposes as they share characteristics with unbacked cryptoassets. We will continue to monitor the wider cryptoasset market and stand ready to take further regulatory action if required.”

Janet Yellen, the US Treasury Secretary, said this week that the collapse of Terra, showed the need for regulation.

“That simply illustrates that this is a rapidly growing product and that there are risks to financial stability and we need a framework that’s appropriate,” she said.

Terra, also known as UST, is designed to be “pegged” to the dollar using software programming that allows owners to always convert one coin for a dollar’s worth of Luna.

In theory, this means that one UST should always be worth one dollar as long as Luna holds some value. However, during a major sell-off, the mechanism by which UST’s value is algorithmically-maintained is unable to keep up with the rush of people attempting to withdraw cash.

Cryptocurrency watchers have suggested that Terra’s sell-off has been caused by a financial attack designed to force its operator, a cryptocurrency group called the Luna Foundation Guard, to sell its Bitcoin reserves, in turn pushing down the price of Bitcoin and allowing traders betting against its value to make a healthy profit.

Commentators likened such a move to Black Wednesday in 1992, when the UK government failed to prop up the value of the pound amid a selling attack from investors including George Soros.

The attack has led existing owners of Terra to panic as its value becomes detached from the stability of the dollar, and hitting confidence in other stablecoins such as Tether.

“It's meant to be the most stable bit of this ecosystem, and stable by design. And clearly that's not happened,” said Gavin Brown, professor in financial technology at The University of Liverpool. “By extension it's starting to influence every other part of the ecosystem as well.”

Millions of investors bought into cryptocurrencies during the pandemic as their value soared, but the market has been hit by a sell-off alongside technology stocks in recent weeks.

Further panic was stoked this week when cryptocurrency exchange Coinbase said in a regulatory filing that customers risked losing all of their cryptocurrency if the company were to go bankrupt. Brian Armstrong, its chief executive, responded by saying: “We have no risk of bankruptcy.”