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What led to crash of crypto assets UST and Luna, and how this impacts Indian investors

“As such, we refute the popular narrative of one “attacker” or “hacker” working to destabilize UST. The de-peg of UST could instead have resulted from the investment decisions of several well-funded entities,” a research report said.

Representational image. Photo: Pixabay

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

UST was trading at around $80 (more than ₹6,000) per coin. From the highs of this, 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 more than ₹6,800, according to Coinbase.

So read: Cryptos can lead to dollarization of economy: RBI officials to par panel

On May 9, UST de-pegged from the dollar, bringing down the whole Terra (LUNA) ecosystem with it. The crisis caused panic among investors, and many onlookers wondered whether other stablecoins would suffer a similar state, a report on cryptopotato said.

Janet Yellen – Treasury Secretary of the United States – even made mention of TerraUSD’s de-pegging during a senate hearing today. She believes it illustrates how stablecoins pose “risks to financial stability” and “need a (regulatory) framework”, the report added.

After the two crypto assets witnessed a massive fall, they were delisted by India’s crypto trading platforms including WazirX, which said, “Based on our most recent reviews, we have decided to delist and cease trading of trading pairs for the following tokens on 13th May 2022 at 9.30AM IST. LUNA/USDT, LUNA/INR, LUNA/WRX.”

In a statement, WazirX said it periodically reviews cryptocurrencies. “We periodically review each token we list to ensure that 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 more in-depth review and potentially delist it. We believe this best protects all our users. When we conduct these reviews, we consider a variety of factors.”

📢 LUNA will be delisted

👉 13th May 2022, 9:30 AM IST: WazirX will delist LUNA/USDT, LUNA/INR, and LUNA/WRX markets.
👉 We will enable Binance free transfer for users to withdraw their LUNA funds.

More info 👇

— WazirX: India Ka Bitcoin Exchange (@WazirXIndia) May 13, 2022

According to a report on ThePrint, UST investors lost almost $45 billion in just a matter of days and this sell-off in one coin triggered a broad sell-off in the crypto market globally and investors started pulling out their money from crypto assets and parking their money in safer ones, like gold.

So read: Crypto could be used to launder money, finance terror: Sitharaman

While there are no official estimates of the size of the crypto market in India, various private estimates suggest that there are 2 crore investors of crypto assets in the country, with a total investment of about $10 billion. According to CoinMarketCap, the total market capitalization of the crypto is $1.2 trillion globally, the report added.

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 Block reported.

This amounts to more than 1.3 billion UST, or roughly 11% of the existing 11.2 billion UST supply, according to CoinGecko. The received proposal received 99.3% of the total cast votes in favor of it. Following the vote, Terraform Labs, Terra’s core development firm, will proceed to execute the burn, it added.

What is a stablecoin?

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

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

1/ Over the past several days, market volatility across crypto assets has been significant.

The market turmoil is also reflected by the past week’s uncertain macro conditions across legacy asset classes.

— LFG | Luna Foundation Guard (@LFG_org) May 9, 2022

As per a CoinDesk report, “UST, a so-called algorithmic stablecoin, works with LUNA to maintain a price of $1 using a set of on-chain mint and burn mechanics. In theory, these mechanics work to ensure traders can always swap $1 worth of UST for $1 worth of Luna, which has a floating price and is meant to serve as a kind of shock absorber for UST’s price.”

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“Luna’s price decline puts its market cap below that of UST’s. That potentially throws the foundation of UST’s entire stabilizing mechanism into jeopardy, because it means a Terra bank run could lead to some users no longer being able to redeem their $1 of UST for $1 of LUNA,” it added.

What do experts say?

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

“As such, we refute the popular narrative of one ‘attacker’ or ‘hacker’ working to destabilize UST. The de-peg of UST could instead have resulted from the investment decisions of several well-funded entities, eg to abide by risk management constraints or alternatively to reduce UST allocations deposited into Anchor in the context of turbulent economic macro and market conditions.

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

“The crypto bear market is in for a long haul as the overall crypto market cap fell by over 5 per cent. Bitcoin is struggling to cross the $30k mark and Ether is under a lot of pressure after slipping below the $1,700 mark. Layer 1 coins like Solana and Avalanche have suffered double-digit losses and the total value locked in the Defi ecosystem witnessed a significant drop,” Shivam Thakral, CEO, BuyUcoin, told Business Today.

“It is important to note that crypto is not the only market in a bear phase, some of the most high-paced tech stocks have faced a major downward trend which is a result of several macroeconomic factors putting pressure on the traditional and crypto market across the globe… The markets are expected to remain choppy and investors should hold onto their position,” he added.

“Terra’s fall could be attributed to large scale selloffs of the LUNA tokens owing to the reported “de-peg” of the algorithmic stable coin. This selloff must have also got exacerbated with the market already being in a largely bearish mode,” Anshul Dhir, COO and Co-founder of EasyFi Network, told 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.

From Financial Year (FY) 2022-23, any income earned (sale consideration (minus) cost of acquisition) from the transfer of virtual digital assets like Crypto and NFT will be taxed at 30% flat, as per the government.

“The Indian exchanges are KYC compliant and ensure that the transactions are secure and the traders are protected against any security threat,” Nischal Shetty, co-founder and chief executive officer at WazirX, was quoted as saying by ThePrint.

“However, due to current taxation laws, there is a possibility for them to shift their capital to unregulated or decentralized P2P (peer to peer) or foreign exchanges. This could become a challenge not only for the exchanges but also for the government to get revenue from taxes,” 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 into the sources of crypto investments and track investors’ cost of acquisition of these crypto assets. This has created a fear among investors.”

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