Metallicus CFO: Terra Collapse Shouldn't Derail Trust in Reserve-Backed Stablecoins

Irina Berkon is the chief financial officer at Metallicus, Inc., a San Francisco-based digital assets technology company that provides services allowing consumers to buy and sell some 65 cryptocurrencies.

Some observers label the collapse of the Terra Luna "stablecoin" a Ponzi scheme; others attribute it to a flawed algorithmic model. Regardless of the characterization, the event triggered a bank run that erased $60 billion in assets. Investors and financial regulators are understandably alarmed: a coin designed to maintain a one-to-one peg with the U.S. dollar now trades for a fraction of a penny.

Why does getting stablecoins right matter so much? Trusted stablecoins do more than streamline inefficient legacy financial processes and transactions. They represent "programmable money"—the foundational layer for building an entirely new segment of the economy.

Consider a two-year-old interacting with a touchscreen: she instinctively expects the screen to respond. When she presses her finger against an old television and nothing happens, she is puzzled and tries again. Just as touchscreens have become the norm for that child, we can envision a future where programmable money—with rules encoded into the underlying technology—becomes the standard rather than the exception.

Stablecoins enable individuals and businesses to manage cash and access opportunities within the blockchain economy. They facilitate transactions between merchants and consumers, across global supply chains, and within the Internet of Things. Stablecoins are also essential for digital asset trading and peer-to-peer decentralized finance (DeFi), offering radical transparency and instantaneous settlement.

Despite their promise, convincing financial institutions, corporations, e-commerce merchants, and consumers to rely on stablecoins is a formidable challenge. Reserve-backed stablecoins, custodied in regulated, insured bank accounts, represent the only viable path for programmable money to become a major driver of daily economic activity.

Returning to Luna and Terra, a critical distinction exists between reserve-backed stablecoins and algorithmic coins. The Luna Foundation attempted to replicate a central bank model using algorithms instead of reserves to maintain the dollar peg. Its flawed model and decisions sent the "stablecoin" into a death spiral. Other stablecoin projects, such as Tether, have also roiled markets and raised regulatory concerns about reserve adequacy and transparency.

Fintechs and traditional financial services players seeking to expand this market are therefore not merely pursuing mass adoption of current digital assets. They will, by necessity, drive the innovations and regulations that enable stablecoins, crypto, and other digital assets to scale.

Take know-your-customer (KYC) requirements as a stumbling block for both compliance and financial inclusion. Just as banks must verify customer identity, fintechs and crypto companies need to design systems that comply with future rules likely to mandate similar verification. Verified identity for on-blockchain transactions enables KYC with human-readable names, allowing all parties to operate with mutual trust while advancing financial inclusion and data privacy protections. Cryptocurrencies and DeFi can be viewed as opportunities for traditional finance to innovate by integrating compliant security and identity solutions into product design.

Central bank digital currencies (CBDCs) are often touted as an alternative to private-sector stablecoins and digital payments. The Chinese government is advancing its digital yuan while banning cryptocurrencies. In the United States, no decision on a CBDC has been made, but Federal Reserve Vice Chair Lael Brainard recently noted that a digital dollar "may be one potential way to ensure that people around the world who use the dollar can continue to rely on the strength and safety of the U.S. currency to transact and conduct business in the digital financial system."

In other words, a FedCoin would become the world's stablecoin, pushing dependence on central banks further into uncharted territory. Policymakers should remain open to the resilience and transparency advantages that stablecoins—issued by traditional banks and supported by decentralized finance—can offer, particularly by tapping into vast pools of capital visible on open blockchains.

An analysis by the Federal Reserve suggests that a stablecoin framework backed by commercial bank assets could positively affect credit provision and household asset accumulation in a world of wider stablecoin issuance and traditional loans. While banks could issue their own tokens, it would be far more efficient to have a few strong, widely circulated stablecoins that can be used interchangeably.

The optimal path to a more inclusive and shock-resistant financial system lies in integrating new technologies with forward-looking policies that raise expectations for transparency, security, and defenses against bad actors. We have the opportunity to leverage underlying technologies—stablecoins, digital assets, smart contracts, and the products built on them—to write both the code and the rules for a better financial system.