👉 News. The UST stablecoin crashed last week.

👉 Why it matters. It was at the heart of many performance services offered by French platforms.

👉 Background. This case comes at a time when the European Union is debating future crypto regulation.

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A real cataclysm. Last week, the crypto universe experienced an almost unheard of crash. In a few days, the Terra project, one of the biggest blockchains on the planet, collapsed like a house of cards, causing investors to lose more than 50 billion dollars. To give you an idea, this represents the equivalent of the capitalization of a major European bank.

The fall of the project created by the South Korean Do Kwon spared no one. From Asia to America to Europe, hundreds of thousands of investors have been affected, but not only because of the collapse of Luna, the token of the Terra blockchain.

Some investors also lost big in lending operations, i.e. loans, with UST, Terra's stablecoin, which offered annual returns of over 10% on average. This is the case of thousands of French investors, who had placed their money with French companies, such as the start-up Just Mining, run by Owen Simonin, aka Hasheur on YouTube (560,000 subscribers).

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Just Mining is obviously not the only company concerned. Other French and foreign start-ups were exposed to the UST, which was still worth $18 billion at the beginning of May before it lost its parity with the dollar (it is currently worth 90% less). According to several sources, the American giant Celsius, which has not yet communicated, could also have been caught in the storm.

To fully understand what happened, it's important to remember that the UST algorithmic stablecoin was one of the stars of the moment in the markets. Until a few weeks ago, you could deposit it in the Anchor protocol for an annual return of 19.5% 🤑. An unbeatable rate in decentralized finance (and pretty much everywhere actually...).

For months, crypto companies have offered their customers stablecoin return products with attractive rates thanks to a simple system: they converted into UST part of the so-called "safe" stablecoins (USDC in particular) entrusted by their customers, which boosted the overall performance. This system obviously broke down when the UST lost its parity with the dollar and started to collapse from May 7.

For almost all the actors we interviewed, the risks of the UST were well identified, notably because of the extraordinary performance it provided. It was "too good to be true", some people say today.

On Wednesday 11 May, Just Mining announced the extent of the damage and an "exceptional" compensation plan: each customer will be covered up to 1250 dollars. "This means that 73% of them will not suffer any loss," says Owen Simonin, the head of the Metz-based company. Nothing legally obliged Just Mining to compensate its clients. 

1.4 million euros to limit the damage

According to our information, the "rescue" plan cost a little more than 1.4 million euros to the start-up, which is a heavyweight in the French ecosystem (65,000 customers in total for all its products). This sum represents about "a third of the company's war chest", concedes Owen Simonin. He also recognizes that the company will have to strengthen its cash flow to remain able to invest.

The possibility of seeking help from a player with deep pockets was once imagined on the side of Just Mining, but was finally ruled out. "Others have been affected by the situation to a greater or lesser extent, at least all those who deal with large volumes on the DeFi," blows the entrepreneur. "We have not yet had the opportunity to debrief all of these essentially international structures. They were all in a hurry and very little available", he testifies.

But is everything now over? If Just Mining seems to have contained the fire, it is not excluded that other companies are also forced to announce losses. According to several sources, the analysis of the flows on the blockchain would sometimes be out of step with the official communication. "Many companies that offer yield (returns on cryptos, ed. note) will surely try to raise funds to contain their losses, if tomorrow all users decided to withdraw their money, we might witness terrible things," worries Anthony Lesoismier, co-founder of Swissborg.

A source close to the Autorité des marchés financiers (AMF) agrees: "If there had been, as in the traditional world, an obligation to return funds, several crypto players could have gone bankrupt.

Nearly 1,000 customers could not be covered

If the "smallest" clients of Just Mining were finally spared, it is not the case of the "biggest" whose losses exceed 1250 dollars. A little more than 1000 of them, out of 4000 positioned on the lending, have been impacted by the fall of the UST and the company's exposure. "About 50 clients are unhappy, but the majority of those who suffered losses were aware of how the product works and the associated risks," insists Thibaut Boutrou, Just Mining's director of operations. "Those who are blaming us did not understand the mechanism well," says the start-up's number two. "We will continue to be even more demanding on transparency and education of our customers. This is important if we want the ecosystem to grow."

Just Mining never hid its exposure to UST in its product description. When a customer sent "safe" stablecoins to the company, they were likely to be converted to UST and therefore subject to the associated risks. "It may seem easy to say after the fact that UST should not be touched, but the Terra ecosystem was valued at $50 billion, so it was inconceivable not to use UST as part of a DeFi diversification," Thibaut Boutrou continues. Before it stalled, the ratio of UST in Just Mining's proceeds was 37%. It then rose to 39.58% due to the fall in its price.

Coinhouse plays it safe

At the end of our investigation, only Just Mining communicated about significant losses related to UST. Coinhouse, France's leading broker, informed its clients on May 14 that this stablecoin "had never been available" either on its exchange platform or in its "Crypto Booklets" (products that offer yields between 4 and 5% on the reputedly safe stablecoins USDT, USDC and EURL). "Our team has always insisted that algorithmic stablecoins, like UST, require a very cautious approach," says its boss Nicolas Louvet.

Just Mining was until March 2022 one of the sources of the Parisian broker to generate the return of its "Crypto Booklets", but the UST was not part of the contract. "We have great confidence in Just Mining, which, like Coinhouse, is a member of Adan (the French association of crypto companies, ed. note) and registered with the AMF," Nicolas Louvet is keen to reassure. "We have known them since their inception and look forward to working with them on new allocations," he continues.

Feel Mining and Swissborg ensure that they have limited the damage

Another French company, Feel Mining, claims to have been affected only at the margin and assures that assets brought in by customers were never exchanged for UST. "Some of the company's equity may have been converted to this stablecoin, but we got out before everything fell apart," says co-founder Nicolas Marchesse. According to him, Feel Mining would have suffered "only 7,000 euros" of damage, "quickly compensated via arbitration".

On the Swiss side, Swissborg, registered with the AMF since the beginning of April, the fragility of the UST had long been identified. "We were among the last to offer it, because it was a request from our community, but we never mixed it with other yield products," explains its co-founder Anthony Lesoismier. In other words, one could get exposure to the juicy returns of UST, but only those who brought in UST could benefit. "We were criticized for our rates, but the choice not to add UST to our traditional yield product mix paid off," he says. According to the company, 7741 customers holding 23 million USTs were affected on May 9.

The AMF asks companies to explain themselves

For a market player who prefers to remain anonymous, "this affair is likely to leave a bitter taste in the mouth of the AMF". The market watchdog has sent a request for information to PSAN-labeled companies to find out their level of involvement in the UST affair.

In the letter we were able to see, the AMF asks the NSPs whether their prudential status (their solvency level) was affected, whether they held UST on their own account, whether they used it as a trading hub, and information on client exposure.

When contacted, the AMF did not wish to comment.

But already some are questioning the effectiveness of PSANs, which more than 30 crypto players have already obtained. "You really have to wonder what this registration is for," calls out a leading French player who preferred to remain anonymous. "It was pretty obvious that the Terra ecosystem had weaknesses and most of the companies with the AMF stamp gave access to UST, especially Binance," he bellows. The Chinese-born giant has had the PSAN since May 4.

In addition to the financial consequences on companies and their customers, this case could have repercussions on the negotiations around the European regulation Markets in Crypto-Assets (MiCA), defining the future legal framework of cryptos, which will include a section on stablecoins. While it was envisaged to exclude decentralized stablecoins (including UST) from the future text, they could finally be subject to a much stricter treatment ...

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