What are UST and Luna and why the collapse of 2 ‘stable coins’ led to the crypto crash in India?

New Delhi: On 5 May, the crypto asset TeraUSD – also known as UST – was trading at $80 (about Rs 6,207) for a coin. On 7th May, UST, against the US Dollar, started falling on all crypto platforms around the world. On May 9, after heavy selling, its price fell to 35 cents. Luna, another crypto coin that supports UST (by buying it if necessary), lost all its value and fell to almost zero.

UST investors lost nearly $45 billion in just a few days. This sell in one coin triggered a massive selloff in the crypto market on a global scale And investors started withdrawing their money from crypto assets and putting their money in safekeeping like gold.

The impact of the UST-Luna crisis was felt in the crypto market in India as well. The three major (in terms of transaction volume) crypto trading platforms in the country – WazirX, CoinDCX and CoinSwitch Kuber – also remove Stressed coins (UST and Luna) from your platform.

While there is no official estimate of the size of the crypto market in India, various private estimates suggest that there are 20 million investors of crypto assets With a total investment of about $10 billion in the country. According to CoinMarketCap, The total market capitalization of crypto globally is $1.2 trillion,

The UST-Luna crisis, due to geopolitical tensions as well as supply chain disruptions caused by Russia’s invasion of Ukraine – and the Indian government introducing a transaction tax and capital gains tax on virtual digital assets, will reduce crypto in the country. There is a market for the property. It has been falling in the last one month.

ThePrint explains the meaning of stable and volatile crypto coins, how the crypto market works and the recent ‘crypto crash’.

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Crypto assets: stablecoins vs ‘volatile’ coins

Over the years, the unusually high returns generated by crypto assets such as bitcoin have forced investors to put their money into virtual digital assets and recognize them as an asset class. However, no one recognizes the inherent volatility of these assets, as the crypto market is currently unregulated globally.

To avoid the risk of volatility, there are ‘stablecoins’, which have an underlying value and are usually pegged against currencies. ‘Stablecoins’ such as Tether do not fluctuate in value as much as other cryptos, such as bitcoin or ether. The value of these coins is usually pegged on the collateral that backs them, such as the US dollar. These coins can also be backed by other crypto assets, such as how UST is backed by Luna.

‘Volatile’ coins are the opposite, meaning they are highly volatile.

What is this stablecoin Terra and why did it fall?

Terra is a public blockchain platform – which helps companies build infra for the apps people do business on – that has two stablecoins, UST and Luna, in which the public can invest their money. At any given point, the value of UST is pegged at $1. The Terra manages to buy and sell these two coins in separate markets to ensure that Luna can return it if UST falls.

For example, if foreign investors start selling the rupee, the Reserve Bank of India (RBI) intervenes in the market to curb volatility by selling dollars, ensuring that the rupee does not fall too much in value.

Through this arbitrage, Terra was able to keep the price of the UST as low as one dollar, while making profits through Luna, and also not have to keep US dollar reserves at all times. There are algorithms that are built into the platform that track the demand and supply of UST and Luna and are designed to balance the two systems.

This arrangement collapsed in May, when large investors in UST and Luna began selling these shares, causing a sharp drop in their prices. Terra announced that they would be building reserves of bitcoin, another cryptocurrency, to balance the system – using it to buy more LUNA and UST to control their falling prices. However, it didn’t work.

Causes of ‘Crypto Crash’ in India

Along with the crashing of UST and Luna, the Indian market for crypto assets is also under strict government-imposed controls, with the imposition of Tax Deduction at Source (TDS) on every crypto transaction – the purchase or sale of securities. The government has also imposed restrictions 30 percent tax on capital gains Created by selling virtual digital assets like these coins.

“Indian exchanges are KYC compliant and ensure that transactions are secure and traders are protected from any security threats,” says Nischal Shetty, co-founder and CEO, WazirX. “However, due to the current taxation laws, there is a possibility for them to move their capital into unregulated or decentralized P2P (peer to peer) or foreign exchange. This generates revenue from taxes not only for exchanges but also for the government. Can become a challenge to do.

Some of the big crypto assets traded in the Indian market include Ethereum (ETH), Binance (BNB), XRP, Solana (SOL), Cardano (ADA), Terra (Luna) and Bitcoin (BTC) – which are the major players. . According to CoinMarketCap, these coins or tokens have lost around 30-60 percent of their value in the past month. information,

Gaurav Mehta, founder of Catax, a crypto and blockchain audit platform, says, “The Indian government is building an infrastructure to tap into the sources of crypto investments and track the investor costs of acquiring these crypto assets. I’ve got scared.”

“Consumers are not ready to invest their money in risky assets,” he said.

According to Shetty, the major decline that is being witnessed in crypto is a global phenomenon. “This can mainly be attributed to developments in the macro-environment such as increase in inflation, increase in interest rates by the Federal Reserve, Russo-Ukraine war, etc.,” he says.

He added that crypto markets are mirroring traditional financial markets as both are seeing improvement. “This indicates that crypto markets are gaining maturity – like other markets, crypto has had a bear and bull run and currently, we are going through a bearish phase.”

need for regulation

Shetty says the crypto market needs to be regulated just like any other financial industry, but cryptocurrency and regulation of the Official Digital Currency Bill, proposed by the government last year, in its current form could reduce investor participation.

“Cryptocurrency needs to be regulated, and we have been voicing this for some time now. Crypto asset regulation, including taxation, in alignment with any other financial industry regulation, will be a prerequisite for the industry to flourish. However, the existing bill sets norms that instead of encouraging more people to join the bandwagon, may reduce participation and increase inefficiencies,” he says.

Last year the Narendra Modi government listed Cryptocurrency and Regulation of Official Digital Currency Bill in Lok Sabha for Winter Session of Parliament. The bill aims to ban all cryptocurrencies as a payment method in India, except for some private coins, to promote the underlying technologies. However, the bill allowed the Reserve Bank of India to establish an official digital currency.

later the government clarified The bill will not be considered in the winter session.

In January, Prime Minister Modi called for synchronizing global action To regulate crypto assets. Addressing the World Economic Forum, Modi said that the steps taken by a country to regulate cryptocurrencies may not be enough, given the technology involved.

Earlier this week, an intergovernmental panel comprising the leaders of the Group of Seven countries or G7 – the UK, USA, Canada, Japan, Germany, France and Italy as well as the European Union – called Following the turmoil over the demise of the Terra (UST and Luna) stablecoins last week, there has been a call for wider regulation of cryptocurrencies.

(Edited by Polomi Banerjee)

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