The next crypto rout may hit all markets

The traditional banking system has been integrating itself closer to the crypto ecosystem over the last 18 months, thanks to a groundswell of retail investor demand to hold crypto assets as well as institutional investors developing long-term strategies in the space.

Regulators are moving to put parameters around crypto assets; US President Biden has issued an executive order to create a regulatory framework around cryptocurrencies, and the Australian Treasury is examining its own regulatory policies to protect investors without stifling innovation.

But even without regulatory parameters, Chainalysis, which advises Commonwealth Bank on crypto risks, has observed through its global data flows the large volumes of institutional money ploughing into decentralised finance projects, including those with exposure to UST.

“You could call that a win for crypto, but at the same time it creates another destabilising factor in markets,” Mr Gronager said.

“This will have compounding effects that could cause other things to happen, ideally not tomorrow, but let’s see.”

Terra, or UST, which is meant to track the US dollar cent for cent, caused widespread panic on Tuesday after a mechanism that involved the issuance and burning of a coin called Luna broke down and it was decoupled from its US dollar peg.

Unlike other stablecoins that are backed by US dollars or US paper, UST was backed by an algorithm that paid traders an 18 per cent interest rate to maintain the peg as well as a backstop of $US2.3 billion worth of bitcoins.

But the backstop wasn’t enough to support the UST price, which has fallen sharply.

“What the crypto industry is learning right now is, what is enough? How much backing do you actually need to support the stablecoin,” Mr Gronager said.

“All of these projects start on a sunny day when everything works, but when the storm comes, they might break, and we find out whether they invested enough in that problem.”

Chainalysis straddles a line between crypto’s wild west and law enforcement agencies that use its blockchain-tracking products to chase illegal movements of cryptocurrency.

Its freshly raised capital will help the data-based business expand its product line to include NFT analysis, and increase its rapidly growing headcount around the world.