Luna collapse used by Chinese state media to justify cryptocurrency ban following ‘bloodbath’ for investors

Economic Daily said Luna’s plummeting value to less than 1 US cent ‘proves the timely and effective action of our country’s regulators’
Luna has been a hot topic on Chinese social media after its stablecoin sibling TerraUSD lost its peg to the US dollar last week and entered a death spiral

Digital currencies

Yaling Jiangin Shanghai

Published: 9:00pm, 16 May 2022

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Chinese state media are using the collapse of Luna, which accompanied the fall of its associated stablecoin TerraUSD (UST), to justify the country’s ban of cryptocurrency trading, as topics related to the crash continued to trend on microblogging platform Weibo.

“The bloodbath of cryptocurrencies in the latest incident proves the timely and effective action of our country’s regulators,” trumpeted China’s state-run Economic Daily in a Sunday editorial.

Luna, from Seoul-based Terraform Labs, has dominated crypto-related news for the past week after its stablecoin sibling UST fell well below US$1 and halted trading on May 12, with its current value hovering around 15 US cents. UST is an algorithmic stablecoin that used Luna as a counterweight to maintain a peg to the US dollar, but since its collapse, Luna has also plummeted and is now worth less than 1 US cent.

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With wild price volatility in traditional cryptocurrencies like bitcoin, stablecoins are supposed to be relatively safe assets. They are typically backed up by a stable asset like US dollars or gold, but algorithmic stablecoins like UST aim to use more clever methods of maintaining the peg without having to maintain those reserves.

With the collapse of Luna and UST, other cryptocurrency prices have also dived, giving Beijing a fresh reason to warn the public of the dangers of such assets since issuing a ban on trading them last year over concerns of financial stability.

“Once called ‘digital gold’ and ‘risk-averse assets’ by crypto professionals, [cryptocurrencies] are giving evidence through their own actions of being high risk and a ‘big bubble’,” read the Economic Daily editorial, which was widely republished by other state media.

The past week also shows that cryptocurrency prices can be easily manipulated, the article added, without anything of real value to support them.

Despite related news trending on Weibo for days, as it has on Twitter, the social traffic from related hashtags had been largely restricted by Monday, with view counts in the tens of thousands.

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Is cryptocurrency too risky for China?

“The fact that it could make it on the trending list partially shows that many [Chinese] people have been observing the development of crypto assets,” said Yang Wenna, a China-based analyst for International Finance Corporation, adding that her views do not represent those of her employer.

As an investor in crypto assets such as bitcoin and ether, Yang said the downturn has not swayed her confidence of such assets in the long term. “We are between bull and bear markets. It’s normal for markets to fluctuate,” she said.

Chinese authorities have a complicated history with blockchain. While the government promotes it as a critical technology for the future, Beijing has curbed access and activities related to cryptocurrencies for years. It banned initial coin offerings – a type of fundraising similar to initial public offerings – in 2017 and then four years later banned all transactions involving cryptocurrencies.

Amid a booming global market for non-fungible tokens (NFTs), which offer proof of ownership for digital assets like artwork by linking them to blockchain-based tokens, Chinese companies have sought to build their own domestic market that does not need cryptocurrencies to function. Domestic NFTs are typically referred to as “digital collectibles” and must be purchased with yuan.

Yang said she is optimistic about the future of crypto and of China’s new digital yuan (e-CNY), which is not based on blockchain.

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“The direction of the [global] economy is towards a direct coexistence with crypto assets,” she said. “The asset holders believe in [crypto’s] transformative nature.”

While the e-CNY was seen as a response to cryptocurrencies, the central bank digital currency is managed through databases controlled by the People’s Bank of China (PBOC). It has been trialled in several cities over the past few years, and Beijing accelerated the e-CNY roll-out this year with a trial at the Winter Olympics. The PBOC has also gone on a talent hiring spree, while mobile payment platforms WeChat Pay, owned by Tencent Holdings, and Ant Group’s Alipay have expanded e-CNY support.

Ant is an affiliate of Alibaba Group Holding, owner of the South China Morning Post.

By the end of 2021, the total transaction value of the e-CNY reached 87.5 billion yuan (US$12.9 billion), according to the central bank.