TL;DR

From 2021-2024, major stablecoin incidents like TerraUSD’s $40B crash, BUSD’s regulatory halt, USDT’s MiCA issues, and technical failures of Basis Cash and Beanstalk underline the need for compliance, transparency, and security in stablecoins

Story

Top 5 notable crypto stablecoin incidents

1. TerraUSD (UST)

• Normal USD Price: 1UST ~ 1USD
• Incident Time: May 2022
• What happened: TerraUSD experienced a catastrophic collapse, losing its peg to the US dollar and dropping to $0.037.
• Why it happened: The collapse was triggered by significant capital flight from UST, causing a chain reaction of large-scale withdrawals from the Anchor protocol.
• How about it now: The incident led to the bankruptcy of several crypto companies, including Celsius, Three Arrows, and Voyager. The project is no longer operational.

2. Binance USD (BUSD)

• Normal USD Price: 1BUSD ~ 1USD
• Incident Time: August 2023 - December 2023
• What happened: Binance announced it would discontinue support for BUSD due to regulatory scrutiny in the United States.
• Why it happened: The New York Department of Financial Services (NYDFS) ordered Paxos, the issuer of BUSD, to halt minting new BUSD tokens. This led to Binance gradually phasing out BUSD support.
• How about it now: Binance has been encouraging users to convert their BUSD holdings to other stablecoins like FDUSD at a 1:1 ratio. BUSD support was fully phased out by the end of December 2023. BUSD is still redeemable through Paxos until at least February 2024.

3. Tether (USDT)

• Normal USD Price: 1USDT = 1USD (Peg maintained within a 0.1% deviation threshold)
• Incident Time: December 30, 2024 (Full implementation of MiCA regulations)
• What happened:
  • Regulatory Compliance: MiCA requires stablecoin issuers to hold a minimum of 2% of their reserves in cash or cash equivalents for liquidity purposes.link
  • Market Impact: Over 20 European cryptocurrency exchanges announced restrictions or delisting of USDT pairs by December 2024 due to MiCA compliance concerns.link
  • Trading Volume: USDT’s trading volume in the EU decreased by approximately 30% in December 2024 compared to November, signaling market uncertainty.link
• Why it happened:
  • Licensing Requirement: Stablecoin issuers must secure an Electronic Money Institution (EMI) or credit institution license in an EU country.link
  • Reserve Transparency: Tether had not published an audited reserve breakdown compliant with MiCA’s transparency rules by the deadline.link
• How about it now:
  • Current Market Share: Despite the EU challenges, USDT maintains a global market share of around 75% among stablecoins.link
  • Geographical Shift: Tether reported an increase in USDT trading volume in Asia, up by 45% from December 2023 to December 2024.link
  • Compliance Efforts: Tether has invested in European stablecoin issuers like StablR to comply indirectly with MiCA through partnerships.link
  • User Confidence: Tether assured users of stability and reliability, with no significant de-pegging observed even amidst regulatory challenges.link

4. Basis Cash

• Normal USD Price: 1BAC ~ 1USD
• Incident Time: January 2021
• What happened: Basis Cash struggled to maintain its peg, falling from $1 to $0.30 within a month.
• Why it happened: The seigniorage algorithm used by Basis Cash failed to stabilize the price, leading to a significant drop.
• How about it now: Basis Cash is no longer active, and the project was abandoned due to its inability to maintain price stability.

5. Beanstalk (2021-2022)

• Normal USD Price: 1BEAN ~ 1USD
• Incident Time: April 17, 2022 (Major exploit)
• What happened: Beanstalk, an algorithmic stablecoin and farming protocol, faced a catastrophic $182 million flash loan attack, leading to the collapse of its credit-based system.
• Why it happened:
  • Peg Maintenance: The project struggled to maintain its peg due to its complex mechanics involving credit and debt positions.
  • Lack of Use Case: It lacked a compelling use case, which hindered sustained user engagement.
  • Security: The exploit highlighted significant vulnerabilities in governance and smart contract security.
• How about it now: After the exploit, Beanstalk was effectively abandoned; the original project is no longer operational, though there were attempts to fork or revive parts of it.

Advice

USDT’s FUD is normal and has happened often enough that we don’t need to worry about it. However, with the USDC/USDT ratio at 1.0000 now, why not switch to a better solution?

• Regulatory Watch: USDC might be safer due to better regulatory compliance; keep an eye on legal landscapes.
• Transparency: Choose based on transparency needs; USDC is generally more open about reserves.
• Use Case: Assess which stablecoin fits better with your DeFi or trading activities.