Stablecoins After UST: Deleveraging, Transparency, and the Road to Regulation

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The collapse of TerraUSD (UST) in May 2022 sent shockwaves through the cryptocurrency ecosystem, triggering a cascade of liquidity crises, institutional failures, and a prolonged period of market deleveraging. As one of the largest algorithmic stablecoins at the time, UST’s implosion not only wiped out billions in market value but also reignited critical questions about the structural integrity, transparency, and regulatory future of stablecoins — the backbone of digital asset markets.

This article dives deep into the post-UST landscape, analyzing shifts in market dynamics, the rise of USDC amid growing scrutiny on USDT, and the evolving regulatory framework that is set to redefine how stablecoins operate. By examining on-chain data, reserve compositions, and policy developments, we uncover how trust, compliance, and asset quality are becoming central pillars in the next era of stablecoin adoption.

The UST Collapse and Its Ripple Effects

On May 9, 2022, UST began to lose its peg to the U.S. dollar. Within days, both UST and its associated token Luna Classic (LUNC) plummeted to near zero. Unlike previous stablecoin failures, UST’s downfall had far-reaching consequences — triggering margin calls, forcing liquidations at firms like Three Arrows Capital and BlockFi, and exposing systemic risks across decentralized finance (DeFi).

UST was an algorithmic stablecoin, relying on a complex mechanism between UST and Luna to maintain its $1 peg — rather than being backed by cash or short-term government bonds. When confidence eroded, the arbitrage mechanism failed, leading to a death spiral.

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Market-Wide Deleveraging

In the week following UST’s de-peg:

More telling was the sharp decline in leverage across major lending protocols:

These figures confirm that UST’s collapse triggered a wave of forced deleveraging — investors reducing exposure, closing leveraged positions, and withdrawing capital from high-risk protocols.

Stablecoins Prove Resilient — But Trust Is Shifting

Despite the turmoil, stablecoins as a category demonstrated resilience. The ratio of stablecoin market cap to total crypto market cap rose from 12% to 17% by June 2022 — indicating increased demand for safe-haven assets during volatility.

However, not all stablecoins benefited equally. The crisis accelerated a structural shift in market share:

StablecoinType% Market Share Change (May 8–13)
USDTFiat-backed+3.59%
USDCFiat-backed+4.17%
BUSDFiat-backed+1.01%
USTAlgorithmic-6.98%
DAICrypto-collateralized-0.62%

This trend reveals a clear winner: regulated, transparent, fiat-collateralized stablecoins are gaining ground at the expense of algorithmic and opaque models.

USDC vs USDT: The Battle for Dominance Heats Up

For years, Tether’s USDT has dominated the stablecoin space — but cracks in trust have opened the door for competitors like USD Coin (USDC) to close the gap.

Between May 8 and July 5, 2022:

While USDT remains the most widely used stablecoin in terms of trading volume and address count, USDC is rapidly gaining traction due to superior transparency and regulatory compliance.

Why USDC Is Winning Trust

Several key factors differentiate USDC from other stablecoins — especially USDT:

1. Regulatory Compliance

Circle, co-issuer of USDC alongside Coinbase, holds multiple financial licenses:

In contrast, Tether does not hold a BitLicense or equivalent U.S. banking charter.

2. Transparency Through Monthly Audits

USDC publishes monthly attestation reports by Grant Thornton LLP — a top-tier accounting firm. These reports detail reserve composition and confirm full backing.

Tether only resumed quarterly audits in 2021 after legal pressure from the New York Attorney General’s office — and its disclosures remain less frequent and more opaque.

3. Higher-Quality Reserves

As of July 1, 2022:

This makes USDC’s reserves more liquid and lower risk — especially during market stress.

4. Retail-Friendly Redemption

Unlike USDT — which only allows select institutions to redeem tokens for dollars — USDC supports direct redemption for retail users through Circle’s platform and partner banks operating 24/7.

This feature enhances trust but also increases redemption pressure during volatility.

Emerging Risks Behind USDC’s Success

Despite its advantages, USDC is not without vulnerabilities.

Regulatory Gray Areas in "Yield" Products

Circle operates a lending product called Circle Yield, where users can lend USDC in exchange for yield — effectively functioning like a bank. However:

When these borrowers faced insolvency during the 2022 downturn, concerns grew about potential defaults impacting Circle’s balance sheet.

Redemption Pressure During Crises

In June 2022 alone, $14.7 billion in USDC was redeemed — equivalent to 26% of its market cap at the time. With only 24% of reserves in cash, Circle must rapidly liquidate Treasuries to meet demand.

While this test was passed successfully during the bear market, extreme scenarios could strain liquidity — especially if multiple platforms face simultaneous redemption waves.

The Future of Stablecoins: Regulation Is Coming

Global regulators are moving swiftly to establish clear rules for stablecoin issuers — with the U.S. leading the charge.

Federal Initiatives

Lummis-Gillibrand Payment Stablecoin Act

Introduced in June 2025, this bipartisan bill proposes that:

Under this framework, USDC is well-positioned, while USDT may need significant restructuring.

Senate Hearings Signal Urgency

In early 2025, the U.S. Senate held hearings emphasizing that stablecoins are no longer niche tools — they’re becoming part of mainstream payments and pose systemic risks if left unregulated.

State-Level Action: New York Leads

The New York Department of Financial Services (NYDFS) issued guidelines requiring:

Stablecoins like GUSD and BUSD already comply; others will need to adapt or exit regulated markets.

Frequently Asked Questions (FAQ)

Q: What caused the UST crash?
A: UST relied on an algorithmic mechanism tied to Luna instead of real-world assets. When confidence waned, arbitrage broke down, leading to a death spiral.

Q: Are stablecoins safe?
A: Fiat-backed stablecoins like USDC and USDT are generally safe if fully reserved and transparent. However, risks remain around reserve quality, redemption access, and counterparty exposure.

Q: Can USDC replace USDT?
A: Yes — especially under stricter regulation. USDC’s transparency and compliance give it a structural edge in gaining institutional adoption.

Q: What happens if a stablecoin gets depegged?
A: A temporary depeg can cause panic selling and margin calls. If confidence isn’t restored quickly, it can lead to broader market contagion — as seen with UST.

Q: How do I check a stablecoin’s reserves?
A: Look for regular third-party attestations. USDC publishes monthly reports; Tether provides quarterly summaries.

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Conclusion: The New Era of Stablecoins

The post-UST world demands higher standards: full reserves, real-time transparency, regulatory compliance, and robust redemption mechanisms.

USDC has emerged as a model for what a modern stablecoin should look like — combining technical efficiency with institutional-grade oversight. Meanwhile, regulatory momentum suggests that only those who meet stringent requirements will survive long-term.

As central banks explore digital currencies and traditional finance integrates blockchain rails, compliant stablecoins are poised to become critical infrastructure for global payments.

For investors and users alike, the message is clear: trust must be earned — and proven daily through transparency.

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