An op-ed published in the state-backed Chinese publication Economic Daily stated that the recent crash of Terra blockchain’s LUNA and the decoupling of the UST stablecoin is evidence of the Asian country’s decision to ban crypto-related activities. In the article, the author cited the Fed rate hike and the buying and selling of crypto assets by several investment giants as the reasons for the recent market crash.

The impact of recent U.S. interest rate hikes

An author who writes for the Chinese government-backed publication Economic Daily believes that the recent crash of Terra’s LUNA and the decoupling of the UST stablecoin justifies China’s decision to block or ban activities related to virtual currencies. Author Li Hualin also claimed that China’s “decisive” and “timely” actions helped “fight the ‘false fire’ of virtual currency speculation and put a ‘protection lock’ on investors’ wallets”.

Troubles for the Terra blockchain’s native token, LUNA, began when another of the network’s projects, the algorithmic stablecoin UST, lost its peg to the U.S. dollar, Bitcoin.com News reported. Initial efforts to rescue the stablecoin prompted the native coin to plummet from a price above $87 on May 4, 2022, to its current price of just under $0.0003.

While some crypto pundits have blamed the coin’s collapse on the actions of project leader Do Kwon, the Chinese author appears to attribute the coin’s decline primarily to the Fed rate hike. Explaining how rising interest rates caused the coin to plummet, the author wrote:

Since the beginning of this year, the Federal Reserve has launched a cycle of raising interest rates, and global liquidity has tightened. Especially in early May, the Federal Reserve raised interest rates by 50 basis points at a time, which had a negative impact on capital and market sentiment, and virtual currencies were the first to bear the brunt.

Virtual Currency and Chinese Law

After the collapse of two Terra coins, some in the crypto community are still trying to piece together what could have led to the spectacular crash. However, others have accused two companies, Blackrock and Citadel, of being behind LUNA’s woes. The allegations have been rejected by the company.

At the same time, the Chinese author claimed in the article that investment giants’ participation in the crypto market “could lead to wild fluctuations in the value of the currency, triggering massive sell-offs.”

Hualin also reiterated that virtual currency transactions are not protected by Chinese law. The comments appear to contradict a recent ruling by the Shanghai High People’s Court confirming that Bitcoin is a virtual asset protected by Chinese law.

The author finally calls on investors to “remain rational, eliminate the greed of bargain hunting in time, and stay away from related trading speculation, otherwise it is very likely that ‘currency will go to wealth’.”

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Terence Chimwala

Terence Zimwara is an award-winning journalist, author and author from Zimbabwe. He has written extensively on the economic woes of some African countries and how digital currencies can offer Africans an escape route.