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Crypto: TerraUSD stablecoin drops below peg value amid sell-off

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Yahoo Finance's David Hollerith joins Yahoo Finance Live to discuss what TerraUSD's price falling below its fixed value means for stablecoins.

Video transcript

DO KWON: Stablecoins that are pegged to various different Fiat currencies, such as the US dollar, the Korean won, the SGD, and so on and so forth, that are entirely decentralized and cannot be censored. So this-- on top of these things, we have applications such as Anchor, whereby stablecoins can be depositing into smart contracts, and THEY can be leveraged to tap into the power of staking yields that are coming in from multiple blockchains to power a 19.5% yield on a pair of stablecoins, which is the best risk adjusted yield that you can get on any stablecoin in the market.

AKIKO FUJITA: Well, that was Terraform Labs CEO Do Kwon speaking about his company's stablecoin, Terra, on Yahoo Finance back in October of last year. But Terra has had a painful week this week, losing 50% of its value in the last 24 hours. Joining me now with more on this story is Yahoo Finance's David Hollerith. And David, when you look through the numbers here, the token fell as much as $0.62. I mean, this is a coin that's supposed to be pegged to the dollar. What are the implications of this for other stablecoins?

DAVID HOLLERITH: Right, Akiko. That's a good way to get into it. This is a complicated story that's sort of developing as we speak. But for other stablecoins, it means that they're likely to take advantage. You know, when a stablecoin drops below its peg-- they can be pegged to a lot of different assets, but typically, it's the US dollar. So when they-- in this case, when Terra USD dropped below its $1 peg, it became harder to sort of shore up interest in the asset.

And last night, it dropped below $0.70, which doesn't sound like much for a cryptocurrency, but is huge for a stablecoin. And that's really had ramifications in the sense that there's a lot of money in this thing. $18 billion before the drop, and Terra USD lost about $5 billion. It has since recovered, and now it's trading back around $0.92. Its sister coin, which is used to sort of govern its price, Luna, has fallen, as you can see, by much greater degrees, almost 50% last I checked. But it is changing pretty rapidly. It looks like-- yeah, it looks like 52% as of right now. So that is an ongoing situation.

The other thing here is that sort of as a buyer of last resort effort, the non-profit organization that sort of manages this algorithmic stablecoin is coming in with about a $1.5 billion loan in Bitcoin to shore up the reserves. That means there's going to be foreseeably a lot of selling events of Bitcoin and potentially other assets, as they try and defend their price.

AKIKO FUJITA: Yeah, I mean, this charge pretty much says it all in terms of the declines that we've seen. Alongside those declines, we saw one of the largest crypto trading platforms, Binance, suspend Luna and UST withdrawals. What did we hear? Why did they do that?

DAVID HOLLERITH: Right, yeah. I spoke with them last night. And this is sort of after reports that Binance had sort of limited trading in such a way that even though Terra USD was trading above $0.70 at the time by market value, one could only buy or sell it at $0.70. So they were effectively controlling the price mechanism. Binance, again, is one of the largest global exchanges.

Now, what they said to me was essentially that they had to sort of do this as a way to limit withdrawals of Terra, Luna in the same sense that we saw something like Robinhood halt order trading for GameStop. So it's sort of-- they said it's sort of a matter of volatility. Now it sort of remains to be seen. There's a lot of hearsay about what's actually going on. There's another mystery which is sort of who originally sort of knocked the Terra USD off its balance back over the weekend and sort of sparked all this. So still a lot of questions to answer.

AKIKO FUJITA: OK, and I know you'll stay on top of that. David Hollerith, thanks so much for that.

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