$60B Terra Wash Is Not Crypto’s Bear Stearns Moment: Regulators – Reuters

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WASHINGTON – The past few weeks have been brutal for the crypto market.

One of the most popular US dollar stablecoins, terraUSD, collapsed almost overnight, wiping half a trillion dollars from the industry’s market value.

Meanwhile, digital currencies like ether continue to be beaten on price charts as sales continue to impact the industry.

Some investors have described last month’s events as The Bear Stearns moment for crypto, comparing the contagious impact of a failed stablecoin project to the fall of a major Wall Street bank that ultimately predicted mortgage debt, and the 2008 financial crisis.

“It really exposed the deeper vulnerabilities in the system,” said Michael Hsu, who serves as the Currency Controller for the U.S. Treasury Department.

“Obviously you’ve seen contagion from terra to the broader crypto ecosystem, but also to other stablecoins, and I think that’s something that wasn’t assumed. And I think that’s something people really need to pay attention to.”

But so far, government officials don’t seem worried about a crypto crash decimating the broader economy.

Several senators and regulators told CNBC on the sidelines of the DC Blockchain Summit this week that ripple effects are under control, crypto investors should not panic, US regulation is key to the success of cryptocurrencies, and more importantly, the crypto asset class is not going anywhere.

“This game should have rules that make it more predictable, transparent, where there are necessary consumer protections,” said Senator Cory Booker of D-NJ.

“What we don’t want to do is suffocate new industry and innovation to lose opportunities. Or what I’m seeing right now is that most of these opportunities are moving abroad and we’re missing out on economic growth and the job creation that is part of it. So if we have the right regulations, this is a really important area, it can really help the industry and protect consumers,” Booker continued.

a comprehensive event

Earlier in May, a popular stablecoin known as terraUSD or UST tumbled in what some described as a “bank run” as investors rushed to withdraw their money. At their peak, Luna and UST had a combined market capitalization of approximately $60 billion. Now they are essentially worthless.

Stablecoins are a type of cryptocurrency whose value is tied to the price of a real-world asset such as the US dollar. UST is a specific type known as an “algorithmic” stablecoin. Unlike the USDC (another popular dollar-pegged stablecoin), which kept fiat assets in reserve as a way to back up its tokens, UST relied on computer code to self-stabilize its value.

UST has fixed prices around $1 by tying a sister token called luna via computer code running on the blockchain – essentially investors can “destroy” one coin to help stabilize the price of the other. Both coins were issued by an organization called Terraform Labs, and the developers used the base system to build other applications such as NFTs and decentralized finance applications.

As the Luna price became volatile, investors rushed to both coins, causing prices to plummet.

While the UST’s failure was contagious, it came as little surprise to some crypto experts.

Nic Carter of Coin Metrics told CNBC that no algorithmic stablecoin has been successful, noting that the main problem with UST is that it is largely backed by trust in the issuer.

Senator Cynthia Lummis of R-Wyo, who is among Capitol Hill’s most progressive crypto legislators, agrees with Carter.

“There are several types of stablecoins. It is an algorithmic stablecoin that is very different from a failing, asset-backed stablecoin, Lummis told CNBC. He said he hopes consumers will see that not all stablecoins are created equal and that choosing an asset-backed stablecoin is key.

This sentiment was echoed by the director general of the International Monetary Fund at the annual meeting of the World Economic Forum in Davos.

“I beg you not to retreat from the importance of this world,” said IMF director Kristalina Georgieva. “It gives us all faster service, much lower costs, and greater engagement, but only if we separate apples from oranges and bananas.”

Georgieva also pointed out that stablecoins that are not backed by assets to support them are a pyramid scheme, emphasizing that it is the regulators’ responsibility to take protective measures for investors.

“I think we’re going to accelerate regulation because of the events of the past few weeks,” said Hester Peirce of the Securities and Exchange Commission. of UST.

“We need to make sure that we retain people’s ability to experiment with different models and that we do so in a regulatory manner,” the SEC commissioner continued.

Legislation against shadow banking

According to Commissioner Caroline Pham of the Commodity Futures Trading Commission, the collapse of the IHR highlights how regulators must take steps to protect themselves against a possible return of shadow banking, a type of banking system in which financial activities are facilitated by unregulated intermediaries. or in unregulated cases.

Pham says many of the warranties available can do the trick.

“It’s always quicker to get a regulatory framework in place when it already has one,” Pham said. “You’re just talking about expanding the regulatory environment around new innovative products.”

Months before the failure of the UST algorithmic stablecoin project, the President’s Financial Markets Task Force released a report outlining a regulatory framework for stablecoins. In it, the group divides the stablecoin landscape into two main camps: stablecoin trading and stablecoin payment.

Today, stablecoins are typically used to facilitate trading in other digital assets. The report aims to identify best practices for issuing stablecoins so that they can be used more widely as means of payment.

“For banking regulators like me, we’re kind of a historian of monetary instruments,” said Hsu, a co-author of the report with the Office of the Currency Supervisor.

“This is a really familiar story and the way to deal with it is prudent regulation. So I think some of the options, proposals for a more banking-like regulatory approach are a good place to start.”

The key question regulators and legislators need to address is whether stablecoins, including the subset of algorithmic stablecoins, are actually derivatives, Pham said.

If people start thinking of some of these truly new crypto tokens as obviously lottery tickets. When you get there and buy a lottery ticket, you might win big and get rich quick, but you might not.

Caroline Pham

CFTC Commissioner

Generally speaking, a derivative is a financial instrument that allows people to trade on the price fluctuations of an underlying asset. The underlying asset could be just about anything, including commodities like gold or – depending on how the SEC thinks right now – a cryptocurrency like bitcoin.

The SEC regulates securities, but for anything that isn’t securities, the CFTC likely has a regulatory touchpoint, Pham says.

“We have commodity-based derivatives regulations, but we also have specific areas where we regulate spot markets directly,” Pham said.

“The last time we had something like this in the financial crisis – risky, opaque, complex financial products – Congress came up with a solution to it, and it was with Dodd-Frank,” Pham continued, referring to Wall Street Reform. Consumer Protection Act passed in response to the recession. The law included new restrictions on the business practices of FDIC insured entities, as well as tighter regulations on derivatives.

“If some of these trading stables are actually derivatives, you are basically talking about a private basket exchange and then it is the dealer who has to manage the risk associated with it,” Pham said.

Congress leads

Finally, SEC Commissioner Peirce says Congress has decided how to move crypto regulation forward. While Wall Street’s top regulator is already acting in the power it has, Congress needs to share enforcement responsibilities.

To explain this regulatory division of labor in a bill, Lummis spoke to Senator Kirsten Gillibrand, DN.Y. partnered with.

“We are placing it on top of the existing regulatory framework for assets, including the CFTC and the SEC,” Lummis told CNBC. “We ensure that taxation is on capital gains, not ordinary income. We’ve covered some accounting procedures, some definitions, we’re looking at consumer protection and privacy.”

The bill also addresses the regulation of stablecoins. Lummis says the bill considers the existence of this particular subset of digital assets and requires them to be insured by the FDIC or backed by more than 100% by durable assets.

Booker said there’s a group in the Senate where “good people from both sides of the aisle” come together and come together to do the right thing.

“I want the right arrangements,” Booker continued. “I don’t think the SEC is the place to regulate much of this industry. Frankly, ethereum and bitcoin, which make up the majority of cryptocurrencies, are more like commodities.”

But until Capitol Hill passes a law, Pham says crypto investors need to be much more careful.

“If people start thinking of some of these really new crypto tokens as, frankly, lottery tickets, when you go and buy a lottery ticket, you can have great success and get rich quick, but you can’t,” Pham said.

“I think what worries me is that without proper customer protections and proper disclosures, people are buying some of these crypto tokens thinking they are a guarantee of getting rich,” he said.

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