The Collapse of Terra as a Catalyst for New Laws for Stablecoins around the World

The collapse of Terra and the huge losses of investors from all over the world attracted the attention of lawmakers from different countries. The United States, South Korea and China have already made a statement on the development of rules for regulating stablecoins.

The spiral effect of Terra, which reduced the cost of the algorithmic stablecoin TerraUSD (UST) and brought it down to a record low of $0.30, called into question the future of not only algorithmic stablecoins, but all stablecoins in general. The collapse of Terra has become fertile ground for the development of new regulatory laws.

USA

After the collapse of Terra, American regulators actively promoted stricter rules regarding stablecoins. The US Treasury Secretary, Janet Yellen, talked about plans to adopt legislation by the end of the year.

“I think [the situation with TerraUSD] 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,” said Yellen.

In addition to the words from the Secretary of the Treasury, the Congressional Research Service has published a study report on the collapse of UST. The report describes the collapse of LUNA as a “startup” scenario, which leads to several investors simultaneously withdrawing money from the ecosystem. The document also notes that these conditions in the traditional financial sector are protected by rules that protect against such scenarios, but without any rules, this can lead to market instability in the crypto ecosystem.

Thus, the US government will certainly try to speed up its powers to regulate stablecoins, since the collapse of Terra clearly showed that at the moment it cannot regulate the digital economy in any way.

South Korea

The sudden collapse of Terra worth $40 billion has been the subject of numerous controversies in the Korean and global crypto community.

The Political Affairs Committee of the National Assembly summoned Terraform Labs co-founder Do Kwon to a parliamentary hearing after the collapse of Terra. Also, the South Korean government is going to regulate the work of crypto exchanges and has already organized a meeting with their representatives.

The Korean Financial Supervisory Service (FSS) has announced that it will standardize the way it assesses the risks of virtual assets. According to a local news report, this is due to the fact that it is currently difficult to protect investors due to the many ways to measure risk for each virtual asset exchange. Although the FSS standardization efforts are still in their infancy, when a legal framework for virtual assets is created, it is expected that a single valuation system can be implemented for all exchanges.

China

The state-run Chinese edition of Economic Daily reported on May 31 that China may introduce even tougher rules on cryptocurrencies and stablecoins due to the collapse of the Terra ecosystem.

In an article by a Chinese journalist, Li Hualin, the successes of the Chinese government were noted. The author said that the regulatory measures taken earlier helped protect citizens from large losses associated with the collapse of Terra.

“In the future, our country will also speed up the completion of regulatory shortcomings, and introduce targeted regulatory measures for the risk of stablecoins to further reduce the space for virtual currency speculation, illegal financial activities and related illegal and criminal activities, and better protect the safety of the people.” — added Li Hualin.

It is safe to say that the collapse of Terra was a turning point for the regulation of stablecoins around the world. We may find out what the new rules of the game will be in the near future.