What led to the crash of UST and Luna crypto assets, and how it affects Indian investors

“As such, we refute the popular narrative of an ‘attacker’ or ‘hacker’ working to destabilize the UST. Rather, the UST detachment could have resulted from the investment decisions of multiple well-funded entities,” said a research report.

Representative image. Photo: Pixabay

Cryptocurrency investors earlier this month lost billions of dollars after crypto assets TerraUSD (UST) and Luna values ​​crashed to near zero. The effects of this were also felt in India.

UST was trading at around $80 (over ₹6,000) per coin. From the highs it fell to 35 cents and on May 28 it was just ₹2.95. Luna’s value was almost zero (₹0.007). A month ago it was over ₹6,800, according to Coinbase.

Read also : Cryptos can lead to dollarization of economy: RBI officials on panel

On May 9, the UST broke away from the dollar, dragging the entire Terra (LUNA) ecosystem with it. The crisis caused panic among investors, and many onlookers wondered if other stablecoins would suffer a similar state, a report on cryptoapple said.

Advertising

Janet Yellen, Secretary of the United States Treasury, even mentioned the unpecking of TerraUSD during a Senate hearing today. She believes this illustrates how stablecoins pose “risks to financial stability” and “require a (regulatory) framework,” the report adds.

After the two crypto assets experienced a massive drop, they were delisted by Indian crypto trading platforms including WazirXwhich stated, “Based on our most recent reviews, we have decided to delist and cease trading trading pairs for the following tokens on May 13, 2022 at 9:30 AM IST. LUNA/USDT, LUNA /INR, LUNA/WRX.”

In a report, WazirX said it periodically reviews cryptocurrencies. “We periodically review each token we list to ensure it continues to meet the high level of standard we expect. When a coin or token no longer meets this standard, or the industry changes, we conduct a further review and possibly remove it from the list. We believe this best protects all of our users. When we conduct these reviews, we consider a variety of factors.

According to a report on The footprintUS investors lost nearly $45 billion in just a few days and this one-piece selloff sparked a large selloff in the global crypto market and investors started withdrawing their money from crypto assets and placing their money into safer assets, such as gold.

Read also : Crypto could be used to launder money and finance terrorism: Sitharaman

Although there are no official estimates of the size of the crypto market in India, various private estimates suggest that there are 2 million crypto asset investors in the country, with total investment around $10 billion. According CoinMarketCapthe total crypto market capitalization is $1.2 trillion globally, the report adds.

On May 26, the Terra governance system voted to approve a proposal to burn all UST tokens held in the project’s community pool and UST deployed for past liquidity incentives on Ethereum, The blocks reported.

This represents more than 1.3 billion UST, or about 11% of the existing supply of 11.2 billion UST, according to CoinGecko. The proposal received 99.3% of the total votes cast in favor. After the vote, Terraform Labs, Terra’s main development company, will carry out the etching, he added.

What is a stablecoin?

According Investopedia, stablecoins are cryptocurrencies whose value is indexed or linked to that of another currency, commodity or financial instrument. Stablecoins aim to provide an alternative to the high volatility of the most popular cryptocurrencies, especially Bitcoin (BTC), which has made these investments less suitable for wide use in transactions.

“Stablecoins are like bank accounts in the barely regulated crypto world,” says CNBC says the report.

According to a CoinDesk report, “UST, a so-called algorithmic stablecoin, works with LUNA to maintain a price of $1 using a set of mint and chain-burn mechanisms. In theory, these mechanisms work to ensure that traders can always trade $1 of UST for $1 of Luna, which has a floating price and is meant to act as a buffer for the price of the UST.

Read also : FAQ on crypto taxation, virtual digital assets in the works

“Luna’s price drop puts its market capitalization below that of UST. This potentially jeopardizes the foundation of the entire stabilization mechanism of UST, as it means that a run on Terra Bank could prevent some users from exchanging their $1 of UST for $1 of LUNA,” he added.

What are the experts saying?

A Nansen research report stated that a “small number of players” took advantage of weaknesses in the Terra ecosystem.

“As such, we refute the popular narrative of an ‘attacker’ or ‘hacker’ working to destabilize UST. Rather, UST’s de-anchoring could have resulted from the investment decisions of several well-funded entities, e.g. example to comply with risk management constraints or alternatively to reduce UST allocations deposited in Anchor in the context of turbulent macroeconomic and market conditions.

“Our on-chain investigation revealed that a small number of players identified vulnerabilities early in the UST removal, particularly in the relatively shallow liquidity of the Curve pools securing TerraUSD (UST) peg to other stablecoins,” the report reads.

“The crypto bear market is for the long haul as the overall crypto market capitalization has fallen by more than 5%. Bitcoin is struggling to break above $30,000 and Ether is under a lot of pressure after slipping below $1,700. Layer 1 coins like Solana and Avalanche suffered double-digit losses and the total value locked in the Defi ecosystem saw a significant drop,” said Shivam Thakral, CEO of BuyUcoin. business today.

“It is important to note that crypto is not the only market in a bearish phase, some of the fastest growing tech stocks have faced a major downtrend which is the result of several macro factors putting pressure on the traditional market. and crypto across the globe… Markets are expected to remain choppy and investors are expected to hold their ground,” he added.

“Terra’s downfall could be attributed to large-scale sell-offs of LUNA tokens due to the reported ‘de-peg’ of the algorithmic stable coin. This sell-off must also have been exacerbated as the market is already largely bearish,” Anshul Dhir said. , COO and co-founder of EasyFi Network. Financial express online.

Crypto Tax in India

The recent UST and Luna crashes have only added to the woes of Indian crypto investors who are already feeling the burden of crypto taxes.

Starting in fiscal year (FY) 2022-23, any income earned (consideration from the sale (less) the cost of acquisition) from the transfer of virtual digital assets such as Crypto and NFT will be taxed at 30%, according to the government.

“Indian exchanges are KYC compliant and ensure that transactions are secure and traders are protected from any security threats,” said Nischal Shetty, co-founder and managing director of WazirX, as quoted by The footprint.

“However, due to current tax laws, it is possible for them to transfer their capital to unregulated or decentralized P2P (peer to peer) exchanges or to foreign markets. This could become a challenge not only for exchanges but also for the government to get tax revenue,” Shetty added.

Gaurav Mehta, founder of Catax, a crypto and blockchain audit platform, told the website, “The Indian government is building an infrastructure to tap sources of crypto investments and track the cost of acquiring crypto. these crypto assets by investors. This created fear among investors.

Comments are closed.