Washington — It was a cruel week for the crypto market.
One of the most popular US dollar peg stablecoins, terraUSD, exploded virtually overnight, clearing $ 5 trillion from the sector’s market capitalization.
Meanwhile, digital coins such as ether Selling continues to hurt the industry, so it continues to be hit on price charts.
Some investors have an event last month Bear Stearns Moment For cryptocurrencies, we compare the infectious effects of the failed Stablecoin project with the collapse of a major Wall Street bank that finally foretold the 2008 mortgage debt and financial crisis.
“It really revealed some deeper vulnerabilities in the system,” said Michael Sue, US Treasury Office of the Comptroller.
“Obviously, you saw the transmission from Terra to the wider crypto ecosystem, as well as to Tether to other Stablecoins, and I think it wasn’t supposed to be, and it’s people. I think you really have to be careful. “
But so far, government officials don’t seem to be worried about the cryptocurrency crash that would destroy the wider economy.
Several senators and regulators are on the sidelines of this week’s DC blockchain summit to CNBC, the ripple effect is contained, crypto investors should not be surprised, US regulation is the key to cryptocurrency success And, decisively, the crypto asset class goes everywhere that says it isn’t.
“This game needs more predictable and transparent rules where the necessary consumer protection exists,” said Senator Cory Booker of D-NJ.
“What we don’t want to do is choke on new industries and innovations and lose opportunities, or what I’m seeing right now is that many of these opportunities just move abroad and lose the economy. It’s part of that growth and job creation. So if you can regulate it correctly, this is a very important space that can actually help the industry and protect consumers. ” Booker continues.
Contained event
In early May, investors rushed to withdraw money, causing the value of the popular stablecoin known as terraUSD (UST) to plummet. At their height, The total market value of luna and UST was about $ 60 billion..Now they are Essentially worthless..
Stablecoin is a type of cryptocurrency whose value is tied to the price of real-world assets such as the US dollar. UST is a specific breed known as “algorithm” stablecoin. Unlike USDC (another popular dollar peg stablecoin), which has spare flat assets as a way to back up tokens, UST relied on computer code to self-stabilize its value.
UST stabilized the price near $ 1 by linking to a sister token called Luna via computer code running on the blockchain. Basically, an investor can “destroy” one coin and stabilize the price of the other coin. Both coins were issued by an organization called Terraform Labs, and developers used the underlying system to create other applications such as NFTs and decentralized finance apps.
When Luna’s price became volatile, investors rushed out of both tokens, causing prices to plummet.
The failure of UST, though infectious, was not so surprising to some crypto insiders.
CoinMetrics’ Nic Carter told CNBC that algorithmic stablecoin has never been successful, and that the underlying problem with UST is that it is heavily supported by trust in the issuer.
Senator Cynthia Lummis, one of Capitol Hill’s most progressive legislators on cryptocurrencies, R-Wyoming agrees with Carter.
“There are several types of stablecoin. It’s the algorithmic stablecoin that failed, which is very different from asset-backed securities,” Lumis told CNBC. She said she wants consumers to understand that not all stablecoins are equal and that choosing asset-backed stablecoins is essential.
That sentiment was repeated by the Managing Director of the International Monetary Fund. At the World Economic Forum’s annual meeting in Davos..
“I ask you not to draw out the importance of this world,” said IMF Prime Minister Christalina Georgieva. “It offers us all faster service, much lower cost, and more inclusion, but only if we separate apples from oranges and bananas.”
Georgieva also emphasized that Stablecoin is not backed by the assets to support them. It is a mouse lecture He emphasized that the responsibility for installing protective guardrails for investors rests with the regulatory authorities.
“I think the events of the last few weeks are likely to lead to faster regulation,” said Hester Perth of the Securities and Exchange Commission, saying that the Stablecoin Act was already enacted before the collapse of the UST. Said.
“We need to maintain the ability of people to experiment with different models and make sure they do it in a way that fits within the regulatory guardrail,” continued the SEC Commissioner.
Legislation against shadow banking
For Caroline Fam, a Commodity Futures Trading Commission member, UST Meltdown is a regulatory authority to protect against shadow banking, the potential type of banking system in which financial activity is facilitated by unregulated intermediaries. Emphasizes the amount of action that should be taken. Or under unregulated circumstances.
Fam says many existing safety devices can do the trick.
“If a regulatory framework already exists, it’s always faster to launch it,” Fam said. “You’re just talking about extending regulatory boundaries around new, new products.”
A few months before the UST algorithm’s stablecoin project failed, the president’s working group on financial markets Publish the report Outlines the regulatory framework for Stablecoin. In it, the group divides the Stablecoin landscape into two major camps: Stablecoin trading and Stablecoin payments.
Today, stablecoin is commonly used to facilitate the trading of other digital assets. The report aims to set best practices for regulating stablecoin to be more widely used as a payment method.
“For banking regulators like me, we are a kind of historian of money-like commodities,” said Sue, who co-authored the report with the Office of the Comptroller of the Currency.
“This is a really familiar story, and the way to deal with it is prudent regulation. That’s why there are several options. Proposing a regulatory-type approach like a bank is a good starting point.”
An important issue that regulators and lawmakers need to address is whether Stablecoin, which contains a subset of Stablecoin in the algorithm, is actually a derivative, Fam says.
If people frankly start thinking of some of these really novel crypto tokens as lottery tickets. When you go and buy a lottery, you may hit it hard and get rich quickly, but it may not.
Caroline Fam
CFTC Commissioner
Generally speaking, derivatives are financial instruments that allow people to trade on the price fluctuations of the underlying asset. Underlying assets can be almost anything, including commodities such as gold. SEC is currently thinking — Cryptocurrencies such as Bitcoin.
The SEC regulates securities, but for everything but securities, the CFTC probably has some regulatory contact with it, Pham says.
“There are restrictions on commodity-based derivatives, but there are also specific areas that directly regulate the spot market,” Fam said.
“Last time, when something like this exploded in the financial crisis, it was a risky, opaque, complex financial product. Congress came up with a solution. It was the Dodd-Frank Act,” Fam said. He continues. Wall Street Reform and Consumer Protection Act passed in 2010 in response to the Great Recession. The law included new restrictions on the trading practices of FDIC insureds, in addition to stricter regulations on derivatives.
“If some of these trading stablecoins are actually derivatives, we’re basically talking about custom basket swaps, so it’s the dealer who needs to manage the risks associated with them,” Fam explains. Did.
Congress calls a shot
Ultimately, SEC Commissioner Perth says Congress is calling for shots on how to move forward with cryptographic regulations. Wall Street’s top regulatory agencies are already acting with the powers they have, but Congress needs to split its executive responsibilities.
Lummis is working with Senator Kirsten Gillibrand (DN.Y.) to elaborate on this division of regulated labor in the proposed bill.
“We are setting it on top of the current regulatory framework for assets, including the CFTC and SEC,” Lummis told CNBC. “We make sure that taxation is capital gains, not recurring profit. We deal with some accounting procedures, some definitions, and consider consumer protection and privacy.”
The bill also delves into the regulation of Stablecoin. Lummis states that the bill envisions the existence of this particular subset of digital assets, requiring them to be FDIC insured or 100% or more backed by hard assets. increase.
According to Booker, the Senate has a group of “good people on both sides of the aisle” working together to do it right.
“I hope there is the right regulation,” Booker continued. “I don’t think the SEC is the place to regulate much of the industry. Obviously, the majority of cryptocurrencies, Ethereum and Bitcoin, are more like commodities.”
But until Capitol Hill enacts the bill, Fam says crypto investors need to be even more careful.
“If people start thinking frankly of some of these really novel crypto tokens as lottery tickets, when you go and buy a lottery ticket, you may hit it big and get rich quickly. But that may not be the case, “Fam said.
“I’m worried that without proper customer protection and proper disclosure, people are guaranteed to buy some of these crypto tokens and make them rich. I think it’s there, “she said.
