Stable is a claim: what TerraUSD asked of bank front lines
Few banks held TerraUSD, but its collapse reached them through customers: scams riding on the losses, disputes over transfers customers had authorized, and confusion about which products near a deposit were actually protected.
Looking Back revisits one week at a time, from January 2020 to today, and asks what it meant for the banks, health systems and public agencies we serve. The series was written in 2026, with the benefit of hindsight, and each article says which week it looks back on.
The week
Over the weekend of May 7, 2022, and into the following week, TerraUSD (UST) lost its peg to the dollar. UST was an algorithmic stablecoin: it aimed to hold one dollar through a mint-and-burn relationship with a sister token, LUNA, rather than through reserves of cash and securities. As holders rushed to exit, the mechanism minted vast amounts of LUNA, and both tokens collapsed within days, erasing tens of billions of dollars of market value. On May 10, Treasury Secretary Janet Yellen cited the episode in congressional testimony as an example of the risks stablecoins posed. On May 12, even the largest reserve-backed stablecoin briefly traded below one dollar. The stress that began here ran into the crypto lender failures of the summer.
Most banks and credit unions had no direct exposure to UST. Their exposure to the collapse came through the people who bank with them. Retail investors had bought tokens marketed as stable, often through apps that offered high yields for depositing them. When the value disappeared, those customers did what people do when money goes missing. They called their bank. What happened next depended on three front-line capabilities that are easy to overlook in a crypto strategy discussion: recognizing the fraud that follows a crash, handling disputes over transfers the customer had authorized, and keeping clear in the customer’s mind which products carry which protections.
The fraud that follows a crash
Market collapses produce victims, and victims attract a second wave of fraud. After the UST collapse, recovery scams spread across social media and messaging apps: offers to retrieve lost funds for an upfront fee, impersonation of exchanges and investigators, and fake legal claims processes. Investment pitches built on the word stable, some of them outright fraud from the start, also ended at this moment, leaving victims who had sent money by wire or card.
Bank fraud teams were often the first institutional observers of this wave. They saw elderly customers sending repeated wires to new crypto platforms, customers moving savings to an exchange after a phone call from a stranger, and sudden requests to raise transfer limits. Those patterns are detectable. They needed rules tuned to them. One example is an alert on a first-time transfer to a crypto platform above a set amount, for a customer with no prior activity. Another is a short script that lets staff ask a few direct questions before releasing the payment.
Elder financial exploitation programs deserved particular attention. Many states allow or require financial institutions to report suspected exploitation of older adults and, in some cases, to delay a disbursement. Staff need to know those procedures exist and how to use them. Where appropriate, suspicious activity reports also feed the investigations that eventually reach organized scam operations.
Disputes over transfers the customer authorized
The second capability is dispute handling. A customer who lost money on a token usually wants it back from someone, and the bank is the institution they can reach. Some disputes have a basis: unauthorized transfers, errors, or card transactions where network rules may apply. Many do not, because the customer authorized the transfer and the loss came from the investment itself.
That distinction is clear in the rules and painful at the counter. Regulation E protects consumers against unauthorized electronic fund transfers and errors, but it does not cover losses on an investment the consumer chose to make. Card network dispute rights depend on the type of transaction and how it was coded. Wires are generally final. A customer told only no will often escalate, to a complaint portal, a regulator or social media.
Banks that handled this well separated the analysis from the conversation. Dispute teams applied the rules carefully and documented each decision. Front-line staff were trained to explain, calmly and accurately, what the bank could investigate and what it could not reverse. They could also point customers elsewhere, such as a report to law enforcement or the relevant state regulator. Complaint codes specific to crypto losses let compliance teams see the volume and spot cases where the customer had actually been defrauded through the bank’s own channels.
There is a cost trade-off here. Generous goodwill credits calm individual customers but can teach scammers which institutions pay, and they create inconsistent treatment that examiners notice. A written policy on when the bank will make an exception, approved by compliance and applied the same way across branches and the contact center, is fairer and easier to defend. It also gives managers something firmer than discretion when a distressed customer asks to speak to someone senior.
Which products carry which protections
The third capability concerns what customers believe. Words like stable, savings, interest and yield carry meaning in banking because deposits carry federal deposit insurance and are held by supervised institutions. Some crypto products borrowed that vocabulary. A customer who saw a stable token paying a high rate in an app that also showed their bank account could reasonably assume the two were alike.
Banks control part of this. Where a bank or its fintech partner presents crypto features near deposit accounts, design choices matter: visible labels that a token is not a deposit and not insured, separate screens for insured and uninsured balances, and no use of deposit vocabulary for products that do not qualify. Marketing review should apply the same standard to partner materials that carry the bank’s name. Organizations should check with counsel on how deposit insurance representation rules and advertising requirements apply to partner products.
Staff need a plain answer to the question customers asked most often that month: was my money protected. A short, accurate script, reviewed by compliance, prevents both false reassurance and needless alarm. It also protects the institution if regulators later review how complaints were handled.
None of the three capabilities requires a view on whether crypto belongs in a bank. They require recognizing that customers will bring crypto losses to the institution they trust, and preparing the people who answer.
With hindsight
TerraUSD was the first collapse of a difficult year. Crypto lenders froze withdrawals and failed over the summer, FTX failed in November, and in March 2023 two banks with heavy crypto-sector deposits, Silvergate and Signature, wound down or were closed. Terraform Labs and its founder agreed in 2024 to pay about 4.5 billion dollars to settle a Securities and Exchange Commission fraud case. The founder later pleaded guilty to fraud charges in a U.S. court and was sentenced in December 2025 to fifteen years in prison. The policy answer arrived in July 2025. The GENIUS Act created a federal framework for payment stablecoins built on full reserves of high-quality liquid assets and redemption rights, the opposite of the algorithmic design that failed. Recovery scams and crypto investment fraud have remained among the largest categories of reported consumer losses. By 2026, as banks explore stablecoins under explicit rules, the front-line questions from May 2022 still apply.