* ECB officials warn of risks from cryptocurrencies
* Luna Foundation Guard says spent bulk of assets last week trying to prop up TerraUSD
* LFG says will use remaining assets to compensate TerraUSD users (Recasts, adds comments by Luna Foundation Guard)
By Alun John
HONG KONG, May 16 (Reuters) – An affiliate of the company behind collapsed stablecoin TerraUSD said on Monday it had spent the bulk of its reserves trying to defend its dollar peg last week, and would use the remainder to try to compensate some users who had lost out.
The token’s crash last week sent cryptocurrencies tumbling, a slide which resumed on Monday, as bitcoin gave up the gains it had eked out over the weekend
The world’s largest cryptocurrency fell 5% to around $29,700 on Monday in Asian trade, sliding alongside stocks because of worries about high inflation and rising interest rates.
Bitcoin has lost around one fifth of its value so far this month, as the spectacular collapse of TerraUSD, which is meant to be pegged 1:1 to the dollar but currently trading around 14 cents, roiled crypto markets.
Luna Foundation Guard (LFG), a Singapore-based non profit designed to defend TerraUSD, said on Twitter on Monday it would use its remaining assets to compensate remaining users of the so-called stablecoin, starting with the smallest holders, though it had yet to decide the best method of doing so.
The organisation had built up a large reserve including over 80,000 bitcoin and millions of dollars worth of other stablecoins to support TerraUSD, the majority of which it said it had spent trying to prop up the token last week.
LFG had initially pledged to raise a reserve $10 billion in bitcoin. The reserve was down to 313 bitcoin as well as other assets as of now, it tweeted.
REGULATORS EYE CRYPTO
The incident has drawn particular attention, including from financial regulators, to stablecoins and the role they play in the crypto system as a main medium for moving money between cryptocurrencies or for converting balances to fiat cash.
Bank of France Governor Francois Villeroy de Galhau told a conference crypto assets could disrupt the international financial system if they were not regulated and made interoperable in a consistent and appropriate manner across jurisdictions.
He pointed to stablecoins, which he said were somewhat misnamed, as among the sources of risk.
Speaking separately, Fabio Panetta, member of the executive board of the European Central Bank, also said on Monday that stablecoins were vulnerable to runs.
Tether, the world’s largest stablecoin, briefly lost its 1:1 peg on May 12, before recovering. Unlike TerraUSD, Tether is backed by reserves in traditional assets, according to its operating company.
On the same day, bitcoin dropped as far as $25,400, its lowest level since December 2020, but recovered to as high as $31,400 on Sunday.
Ether, the second-largest cryptocurrency, fell 5.6% to around $2,000 on Monday.
Regulators elsewhere are also concerned. The U.S. Federal Reserve warned last week that stablecoins were vulnerable to investor runs because they were backed by assets that could lose value or become illiquid in times of market stress. (Reporting by Alun John; additional reporting by Medha Singh in Bengaluru; Editing by Bradley Perrett and Emelia Sithole-Matarise)