South Korean cryptocurrency entrepreneur co-founder of Terraform Labs (Terra Luna), Do Kwon (C) is taken to court after being arrested at the airport on March 24, 2023 in Podgorica.
London: "Stablecoins" shot to prominence after the creator of one such cryptocurrency, intended to be less volatile than competing coins, was arrested following the collapse of his TerraUSD firm, leaving investors $40 billion out of pocket.
Here are the key things to know following the arrest of South Korean crypto fugitive Do Kwon:
Stablecoins v bitcoins
Stablecoins, such as Tether and USD Coin (USDC), are cryptocurrencies. Their transactions are recorded on a decentralised ledger, the blockchain, and not by a bank as with conventional currencies.
But while cryptocurrencies such as Bitcoin and Ether are notoriously volatile, with fluctuations so great their use as a currency is almost impossible, the makers of stablecoins aim to ensure stability.
Generally they promise parity with the dollar, even if some stablecoins are pegged to the euro, or even gold. According to the US Federal Reserve, the market was worth $150 billion at the end of 2022.
To guarantee a dollar price, Tether or Circle, the issuer of the USDC, claim to hold reserves in assets equivalent to the issued stablecoins.
That doesn't stop surprises: The USDC saw its price wobble when Circle told users it had temporarily lost access to $3.3 billion left in the virtual vaults of the failed Silicon Valley Bank (SVB).
Like casino chips
For now, stablecoins are mainly used to facilitate cryptocurrency exchanges between investors, making them a key cog in the crypto wheel.
The use of stablecoins inside a buying platform is often compared to casino chips, to sell Bitcoins and buy Dogecoins without having to go through a bank.
But their use is growing, especially in countries where the currency has lost value.
At the start of the Russian invasion of Ukraine, donations made with cryptocurrencies, notably stablecoins, were used to boost Kyiv's coffers.
A stablecoin gives users access to a dollar-pegged product without needing a bank account in the United States.
Wary authorities, wishful thinking
Central banks are already taking a dim view of stablecoins because if their use were widespread, they would rival bank exchanges or cash, which are directly regulated.
The Fed has warned against their volatility, while the Bank of England has called for their issuers to be regulated like conventional banks.
The European Central Bank said in a mid-2022 report "the idea that stability can be created in an algorithmic stablecoin with no collateral or quasi-collateral consisting of unbacked crypto-assets that have no inherent value seems to be wishful thinking".
In mid-February, a US regulator banned the largest cryptocurrency buying platform, Binance, from issuing its own "stablecoin", the BUSD.
'Algorithmic' stablecoins?
In the case of the Terra coin issued by Do Kwon, the company said it could guarantee the parity of the asset to the dollar not through reserves but through an algorithm.
The algorithm involved arbitration with another cryptocurrency issued by the same group, the Luna.
The idea was then to decentralise the issuance of the stablecoins, which are too heavily controlled by their creators for some investors who see crypto's anarchic decentralisation as its main attraction.
But in mid-2022, turmoil in the cryptocurrency market revealed loopholes in the system created by Do Kwon, and the two cryptocurrencies collapsed.
The crash caused nearly $40 billion in losses to investors, and a federal jury in New York upheld as many as eight counts against Do Kwon on Thursday, following his arrest in Montenegro.
The fiasco has tempered the market's appetite for algorithmic stablecoins, although some still promise parity with the dollar via an algorithm.
"Algorithmic stablecoins should be treated as unbacked crypto-assets," the ECB said.
