At 8:19 a.m. on Sunday (April 17) the BEAN stablecoin was $1.01, well within the norm for its dollar peg.
At 9:19 a.m., it was at 21 cents; an hour after that, 12 cents. At this writing, the not-so-stablecoin is worth $0.138, after a run caused by news that $180 million had been stolen from its governance reserves.
Welcome to the exact scenario critics of crypto in general, and stablecoins in particular, have been warning about as they’ve called for far stricter regulation on the $180 billion subsector of the cryptocurrency business.
It comes on the heels of another hack that drained $625 million from Ronin Network in March. Like that attack, the Beanstalk Farms theft yesterday targeted a decentralized finance (DeFi) project.
Read also: PYMNTS Crypto Crime Series: Latest DeFi Hack Drains Record $625M
While those warnings generally focused on investors’ concerns that fiat-backed stablecoin issuers might not have the assets to redeem all their tokens, the same problem applies to algorithmic stablecoins like Beanstalk.
Algorithmic stablecoins are a DeFi product whose dollar peg is supported by the automated purchase and sale of a related cryptocurrency token called a governance token. But the core problem — the market’s need for assurance of stability of the coin based on the ability to sell one token for one dollar — remains the same.
See: PYMNTS DeFi Series: What Is an Algorithmic Stablecoin? DAI and the Fiat-Free Dollar Peg
In this case, Beanstalk Farms also used another DeFi tool called liquidity mining to support the governance token’s price. That involves investors locking funds in order to earn rewards — or “yield” — for doing so.
Read more: PYMNTS DeFi Series: What is Yield Farming and Liquidity Mining?
The attack used another DeFi product called a flash loan, which involves taking out a loan, using it for something, and then repaying the loan plus a fee — all in a single transaction.
In this case, the hacker used an exploit — creating a governance proposal that alleged to be about making donations to Ukraine but in fact concealed a malicious smart contract that drained all of the locked funds into an Ethereum wallet.
These funds are being run through a “mixing service” called Tornado that obscures transactions, making it nearly impossible to trace on the blockchain. It’s the same service the North Korean hackers used to clean the Ronin Network, allowing them to turn that crypto into currency.
See also: When Privacy Counts, Crypto Users Turn to Mixing Services
Fear of Runs
In February, the Financial Stability Board called on governments to act faster in regulating cryptocurrencies, and especially stablecoins, saying that “stablecoin assets are equivalent to almost 20% of the total size of U.S. assets held in institutional and retail prime money market funds,” adding that the market cap of the largest stablecoin, Tether’s USDT, is now “approaching that of some of the largest prime money market funds.”
It added that this remarkable growth has happened while “concerns about regulatory compliance, quality and sufficiency of reserve assets, and standards of risk management and governance.”
In the November stablecoin report by the President’s Working Group on Financial Markets (PWG), the Treasury Department-led group called for a requirement that all stablecoins be issued by FDIC-insured institutions — causing an uproar in the stablecoin industry.
Read also: The Case for Stablecoins: A Better, Safer, More Innovative Payments Solution Than Bitcoin
According to the report, the failure of a stablecoin has the potential to cause harm far beyond users of that stablecoin and “could pose systemic risk,” it said. “The mere prospect of a stablecoin not performing as expected could result in a ‘run’ on that stablecoin.”
During a Senate Banking Committee stablecoin hearing on Dec. 14, Sen. Elizabeth Warren (D-Massachusetts) warned that decentralized finance, or DeFi, is “the most dangerous part of the crypto world.”
Read more: Sen Warren Calls DeFi the ‘Most Dangerous’ Part of Crypto at Senate Hearing
Calling stablecoins “the lifeblood of the DeFi ecosystem,” Warren called for far stricter regulations.
It seems likely her position will get a lot more attention now.
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