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

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

Half a trillion dollars was erased from the market value of the sector when terraUSD, one of the most popular US dollar-linked stack coins, imploded virtually overnight.

Meanwhile, digital coins such as ether with taking a hit on the price lists as sales continue to hammer the industry.

Some investors have called the events of the past month The Bear Stearns moment a crypto, comparing the contagious effect 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 revealed deeper vulnerabilities in the system,” said Michael Hsu, acting chief financial officer for the US Treasury Department.

“Of course you’ve seen the contagion, not just from terra to the wider crypto ecosystem, but also to other stable coins, and I think it’s something that was not assumed. And I think it’s something people really need pay attention to.”

But so far, officials do not appear to be worried about a cryptocurrency crashing the wider economy.

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

“There needs to be rules for this game that make it more predictable, transparent where there is the necessary consumer protection,” said Sen. Cory Booker, D-NJ.

“What we do not want to do is stifle new industry and innovation to lose opportunities. Or what I see right now, many of these opportunities are just moving abroad and we are missing out on the economic growth and job creation that is a part of it. So this is a really important area, if we have the right rules, it can actually help the industry and protect consumers, ”Booker continued.

An enclosed event

In early May, a popular stablecoin known as terraUSD or UST fell in value in what some described as a “bank run” as investors rushed to withdraw their money. At their peak, Luna and UST had a total market value of nearly $ 60 billion. Now they are essentially worthless.

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

UST stabilized prices near $ 1 by linking it to a sister token called luna via computer code running on blockchain – in essence, investors could “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 underlying system to create other applications such as NFTs and decentralized financing applications.

As the price of luna became volatile, investors rushed into both tokens, causing prices to fall.

The bug in UST, although contagious, did not come as much of a surprise to some crypto-insiders.

Nic Carter of Coin Metrics told CNBC that no algorithmic stablecoin has ever been a success, noting that the fundamental problem with UST was that it was largely backed by trust in the issuer.

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

“There are several types of stablecoins. The one that failed is an algorithmic stablecoin, very different from an asset-backed stablecoin,” Lummis told CNBC. She said she hoped consumers could see that not all stablecoins are created equal and that the choice of an asset-backed stablecoin is key.

This position was reiterated by the Executive Director of the International Monetary Fund at the annual meeting of the World Economic Forum in Davos.

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

Georgieva also pointed out that stack coins, which are not backed by assets to support them, are a pyramid scheme and stressed that the responsibility lies with regulators to impose protective safeguards on investors.

“I think it’s likely that we’ll speed up regulation because of the events of the last few weeks,” said Hester Peirce of the Securities and Exchange Commission, who also noted that stablecoin legislation is already on the agenda before the fall. of UST.

“We need to make sure we … preserve the ability of people to experiment with different models and do so in a way that fits within regulatory auto-protection,” the SEC commissioner continued.

Legislation against shadow banking

For Commissioner Caroline Pham of the Commodity Futures Trading Commission, the collapse of UST highlights how regulators need to take steps to protect themselves against a possible return of shadow banks, ie. a type of banking system in which financial activities are facilitated by unregulated intermediaries. or under unregulated circumstances.

Pham says many existing warranties could do the trick.

“It’s always faster to put a legislative framework in place when it already exists,” Pham said. “You’re just talking about expanding the regulatory perimeter around new innovative products.”

Months before the failure of UST’s 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: trading in stablecoins and payment stablecoins.

Today, stack coins are typically used to facilitate trading in other digital assets. The report seeks to define best practices for regulating stack coins so that they become more widespread as a means of payment.

“For those like me, banking regulators, we are a kind of historians of monetary instruments,” said Hsu, whose Office of the Currency Controller co-authored the report.

“It’s a really well-known story, and the way to deal with it is precautionary measures. Therefore, I think that some of the possibilities, the proposals for a more bank-like regulatory approach, are a good place to start. ”

The key question that regulators and legislators need to address is whether stack coins, including the subgroup of algorithmic stack coins, are actually derivatives, Pham says.

If people started thinking of some of these really new crypto-tokens like, frankly, lottery tickets. When you go there and buy a lottery ticket, you can win big and quickly get rich, but maybe not.

Caroline Pham

CFTC Commissioner

In general, a derivative is a financial instrument that allows people to trade with the price fluctuations of an underlying asset. The underlying asset can be just about anything, including commodities such as gold or – depending on how the SEC currently thinks – a cryptocurrency such as bitcoin.

The SEC regulates securities, but for anything that is not a security, the CFTC probably has a regulatory touchpoint on it, Pham says.

“We have commodity-based derivatives regulation, but we also have certain 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 found a solution to it, and that was with Dodd-Frank,” Pham continued, referring to the Wall Street Reform and the Consumer Protection Act, passed in 2010 in response to the Great Recession. The law included stricter regulation of derivatives as well as new restrictions in connection with the business practices of FDIC-insured institutions.

“If some of these trading stack coins are in fact derivatives, you’re basically talking about a customized basket exchange, and then it’s the trader who has to manage the risk associated with it,” Pham explained.

Congress takes the lead

Ultimately, says SEC Commissioner Peirce, Congress will decide how to move cryptocurrency regulation forward. While Wall Street’s supreme regulator is already acting using the authority it has, Congress needs to split enforcement responsibility.

Lummis has entered into a collaboration with Senator Kirsten Gillibrand, DN.Y., to clarify this legislative division of labor in a bill.

“We place it above the current regulatory framework for assets, including the CFTC and the SEC,” Lummis told CNBC. “We ensure that taxation takes place on capital gains and not on ordinary income. We have covered some accounting procedures, some definitions, we look at consumer protection and privacy. “

The bill also dives into the regulation of stack coins. Lummis says the bill considers the existence of this specific subset of digital assets and requires that they be FDIC-insured or backed by more than 100% of fixed assets.

Booker says there is a group in the Senate with “good people from both sides of the aisle” who come together and band together to get it right.

“I want there to be the right rules,” Booker continued. “I do not think the SEC is the place to regulate much of this industry. It is clear that ethereum and bitcoin, which make up the majority of cryptocurrencies, are more like commodities.”

But until Capitol Hill passes a bill, Pham says crypto-investors need to exercise much more caution.

“If people started thinking of some of these really new crypto tokens like, honestly, lottery tickets, when you go and buy a lottery ticket, you could hit it big and get rich quick, but you could not,” Pham said.

“I think what worries me is that without the right customer protection in place and the right revelations, people are buying some of these crypto tokens and thinking they are guaranteed to get rich,” he said. .

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