Unbacked Stablecoins Risk ‘Blowing Up in Your Face’: IMF

It would be a mistake to completely avoid cryptocurrencies after the recent collapse of the TerraUSD (UST) stablecoin and its sister token LUNA, according to Kristalina Georgieva, the managing director of the International Monetary Fund (IMF).

“I would beg you not to pull out of the importance of this [crypto] world,” Georgieva said at the World Economic Forum’s annual meeting in Davos on Monday. “It offers us all faster service, much lower costs, and more inclusion, but only if we separate apples from oranges and bananas.”

According to the IMF’s chief, it’s the responsibility of global regulators to provide the education necessary to protect investors.

Georgieva also pointed to the difference between stablecoins that are backed by fiat money and the so-called algorithmic stablecoins like TerraUSD.

“The less there is backing it, the more you should be prepared to take the risk of this thing blowing up in your face,” she said.

The UST stablecoin was created by Singapore-based Terraform Labs in 2018 and used algorithms to help it maintain its stated 1:1 value to the greenback. One of the big draws of the Terra ecosystem was the Anchor lending protocol, which at one point promised lenders annual percentage yields of nearly 20%.

Georgieva compares Terra to “pyramid”

However, things turned sour for the project on May 8, as UST lost its dollar peg, plummeting below $0.15 before hitting an all-time low of $0.0926 on Tuesday, per CoinMarketCap.

Amid the UST crash, LUNA, formerly a top-10 coin by market cap, fell 100% to a fraction of a cent, while the broader crypto market plunged into a massive slump.

“When we look at stablecoins, this is the area where the big mess happened,” Georgieva said, as cited by CNBC.

She added that a stablecoin is only stable when it’s backed 1:1 with real assets.

“When it is not backed with assets, but it is promised to deliver 20% return, it’s a pyramid.” said Georgieva. “What happens to pyramids? … They eventually fall to pieces.”

The IMF’s chief remarks came shortly after Christine Lagarde, the president of the European Central Bank, commented on the TerraUSD collapse, arguing that cryptocurrencies are “worth nothing” and have “no underlying asset to act as an anchor of safety.”