DAVOS, Switzerland — Stablecoins that are not backed by assets to support them are a pyramid scheme, the head of the International Monetary Fund said Monday, hinting at the collapse of terraUSD and luna that sent shockwaves through the cryptocurrency market.
Stablecoins are a type of cryptocurrency that aims to track another asset. In the case of terraUSD, or UST as it’s also know, it promised to track the U.S. dollar. So one UST would be equivalent to one dollar.
But UST is a so-called algorithmic stablecoin. Whereas other stablecoins such as tether and USD Coin claim to be backed with fiat currency and government bonds, UST had no reserves. Instead, UST’s ability to peg itself to the dollar relied on an algorithm.
Earlier this month, UST lost its dollar peg. Luna, the sister token of UST, crashed to $0. The episode fueled a massive slump in cryptocurrencies which saw billions of dollars of value wiped off the market.
“When we look at stablecoins this is the area where the big mess happened. If a stablecoin is backed with assets, one to one, it is stable. When it is not backed with assets, but it is promised to deliver 20% return, it’s a pyramid,” Kristalina Georgieva, managing director of the IMF, said during a panel moderated by CNBC at the World Economic Forum on Monday.
“What happens to pyramids? … They eventually fall to pieces.”