Terra backer uses up bulk of $4b reserves, will pay back 'smallest' holders with remainder

Luna Foundation Guard said it had used the bulk of its reserves to try to prop up TerraUSD. PHOTO: REUTERS

HONG KONG (REUTERS) - An affiliate of the company behind collapsed stablecoin TerraUSD said on Monday (May 16) it had spent the bulk of some US$3 billion (S$4.2 billion) in reserves in a failed attempt to defend its United States dollar peg last week.

Luna Foundation Guard, a Singapore-based non-profit designed to defend TerraUSD, said on Twitter on Monday it would use its remaining assets to compensate remaining users of the so-called stablecoin, starting with the smallest holders, though it had yet to decide the best method of doing so.

The organisation had built up a large reserve, including more than 80,000 bitcoins and millions of dollars worth of other stablecoins, to support TerraUSD, the majority of which it said it had spent trying to prop up the token last week.

Of the 80,394 bitcoins worth US$2.4 billion that it held as at May 7 just prior to TerraUSD losing its US dollar peg, only 313 are still held in reserve, it told its 91,000-plus followers in a Twitter thread.

The token's crash last week sent other cryptocurrencies tumbling, a slide which resumed on Monday, as Bitcoin gave up the gains it had eked out over the weekend.

The world's largest cryptocurrency fell 5 per cent to around US$29,700 on Monday in Asian trade, sliding alongside stocks because of worries about high inflation and rising interest rates. Bitcoin has lost around one-fifth of its value so far this month

Ether, the second-largest cryptocurrency, fell 5.6 per cent to around US$2,000 on Monday.

TerraUSD, which is meant to be pegged one-to-one to the US dollar, is currently trading at below 10 US cents, while affiliated digital coin Luna is virtually worthless.

Regulators eye crypto

Last week's TerraUSD meltdown has drawn particular attention, including from financial regulators, to stablecoins and the role they play in the crypto system as a main medium for moving money between cryptocurrencies or for converting balances to fiat cash.

Bank of France governor Francois Villeroy de Galhau on Monday told a conference that crypto assets could disrupt the international financial system if they were not regulated and made interoperable in a consistent and appropriate manner across jurisdictions.

He pointed to stablecoins, which he said were somewhat misnamed, as among the sources of risk.

Speaking separately, Mr Fabio Panetta, a member of the European Central Bank's executive board, also said on Monday that stablecoins were vulnerable to runs.

Tether, the world's largest stablecoin, briefly lost its one-to-one peg last Thursday (May 12), before recovering. Unlike TerraUSD, Tether is backed by reserves in traditional assets, according to its operating company.

Last Thursday, the Monetary Authority of Singapore (MAS) warned that even stablecoins, promoted as having a stable value, have experienced fluctuations in market price.

"MAS has consistently warned the public on the risk of trading in cryptocurrencies," it said. "Cryptocurrencies are highly volatile and often not anchored on economic fundamentals. This means that it is highly risky and not suitable for retail investors."

The US Federal Reserve warned last week that stablecoins were vulnerable to investor runs because they were backed by assets that could lose value or become illiquid in times of market stress.

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