Cryptocurrency Nightmare: The Unraveling of Stablecoin Security
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Valeria makes around $300 a month selling prepared food from her home in Buenos Aires. The 47-year-old was nervous about keeping the money saved in Argentine pesos because of the country’s inflation rate, which passed an annualized 50% earlier this year. So she put more than $1,000 — all her savings, plus $500 her friend lent her to buy a new refrigerator — into TerraUSD (UST), a cryptocurrency stablecoin that was advertised as being pegged 1-to-1 with the U.S. dollar.
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While cryptocurrencies such as bitcoin have a reputation for volatility, stablecoins present a promise of security. Typically, their prices are tied to a hard currency, like the U.S. dollar, or a commodity, like oil or precious metals. Some, like UST, can also be used to generate yields via protocols, such as Mars and Anchor, whereby users receive a variable or fixed interest rate when they deposit their stablecoins. Valeria had spent months learning about UST before starting to invest in various protocols. In mid-May, the stablecoin lost its peg, meaning that its value diverged from that of the dollar, and its price plunged to mere cents. Valeria watched her savings dwindle to zero, unable to remove the money from the protocols, which had blocked withdrawals. “I invested in a stablecoin that today is worth $0.08,” she told Rest of World. “I feel sickened and helpless.”
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The apparent security of stablecoins has made them attractive to people in countries that experience high inflation or currency devaluations, such as Argentina, Iran, and Nigeria. The UST crash, which has hit other crypto assets, shattered that illusion. Valeria is one of more than a dozen people Rest of World spoke with, from countries including Argentina, Venezuela, Iran, Iraq, and Nigeria, who invested in UST — the third-largest stablecoin — and its accompanying Luna token, and who said they have now lost tens of thousands of dollars in savings. “They scammed [me],” Mudasir, a UST holder from Pakistan, told Rest of World. “I have nothing left, not even a penny.”
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But while users were flocking to UST for its perceived stability, according to Sabbatella, few understood that it still had inherent risks. Unlike other stablecoin providers that claim to hold reserves tied to the underlying asset they track, such as Tether, UST wasn’t backed by actual U.S. dollars but rather a complex algorithmic system that maintained the peg through a network of traders in underlying cryptocurrency Luna. In what some experts suggest may have been a coordinated maneuver, a massive push to buy UST caused the stablecoin to lose its peg, resulting in a bank run — and ensuing death spiral — where holders rushed to sell.
