October 2023


Crypto: Where do we go from here?

State Street LIVE: Research Retreat offers a wide range of academic expertise and timely market insights.

The epic meltdown of Terra LUNA, one of the world’s largest cryptocurrency ecosystems, took just three days in May 2022, wiping out US$50 billion in valuation. Antoinette Schoar, Stewart C. Myers-Horn family professor of finance at MIT Sloan School of Management and State Street Associates academic partner, explained the key takeaways from one of the most dramatic events in crypto, and the complexities and risks associated with cryptocurrencies and decentralized finance (DeFi). She also examined the ongoing monetary policy responses, and how they can shape the crypto market going forward.

Schoar emphasized the need for caution and a deeper understanding of these systems, countering the overly positive narratives often associated with them. "The Terra LUNA case helps to dispel some of the common myths that we have seen in crypto,” she said.


  • Cryptocurrencies and DeFi promise to revolutionize finance by eliminating unnecessary intermediaries and reducing rents. However, simply having open access to the financial system through blockchain technology does not guarantee the elimination of rents or systemic risk. “Information being publicly available is not the same as people having the right models to use information to update on the actual risks that are building up,” Schoar explained.
  • The heterogeneity of investors’ sophistication in the crypto space can lead to different responses and create challenges.
  • Access to technology alone is not sufficient; trust in the financial infrastructure and protection against informational disadvantages are crucial. “This comes from people being convinced that the financial infrastructure itself is safe and is working for them and not against them,” said Schoar. 

Terra LUNA lessons
At the center of the Terra LUNA collapse was a run on a blockchain-based borrowing and lending protocol known as Anchor, which promised high yields to depositors of Terra’s stablecoin, TerraUSD (or UST). The collapse highlighted the need for proper pricing models in crypto, and exposed the complexity of a system that puts smaller, less sophisticated investors at an informational disadvantage, she said.

Schoar also expressed concern over the United States Securities and Exchange Commission’s pending approval of crypto ETFs, citing a lack of transparency, potential security and reputational risks associated with central bank digital currencies, and the impact it could have on the stability of the US banking system.

“The 2022 run on Terra offers important lessons about the fragilities of a decentralized financial system and their implications for systemic risk,” Schoar concluded.

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