Cryptocurrency collapse is a wake up call for many, including Congress

NEW YORK (AP) – Meltings in the cryptocurrency area are common, but the latter has really touched some nerves. Novice investors have taken to online forums to share stories of decimated fortunes and even suicide despair. Experienced crypto advocates, including a prominent billionaire, felt humbled.

When the stablecoin TerraUSD imploded last month, about $ 40 billion in investor funds was wiped out – and so far there has been little or no accountability. Stablecoins are supposed to be the least vulnerable to large fluctuations – hence their name – but Terra suffered a dramatic crash in a matter of days.

The Terra episode publicly revealed a long-known truth in the ever-online crypto community: For every enduring digital currency, like bitcoin, there have been hundreds of failed or worthless currencies in the short history of crypto history. Thus, Terra simply became the latest “sh-coin” – the term society used to describe coins that have disappeared in obscurity.

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Terra’s rapid collapse came when bitcoin, the most popular cryptocurrency, was in the midst of a downturn that wiped out nearly half of its value within months. Events have been a stark reminder that investors, whether professional or not, can roll the dice when it comes to investing in digital assets.

After being mostly indifferent to crypto, it seems Washington has had enough. On Tuesday, two senators – one Democrat and one Republican – proposed legislation to create a regulatory framework around the cryptocurrency industry; other members of Congress are considering more limited legislation.

SEE: Mainstream economists sound the alarm about the need for cryptocurrency

What is surprising, however, is that the cryptocurrency industry is signaling its cooperation. Politicians, crypto enthusiasts and industry lobbyists all point to the collapse of Terra and its Luna token last month as the possible end to the libertarian crypto experiment.

Stablecoins are usually linked to a traditional financial instrument, such as the US dollar, and are intended to be the cryptocurrency equivalent of investing in a conservative money market fund. But Terra was not supported by any sustainable assets. Instead, its founder Do Kwon promised that Terra’s proprietary algorithm would keep the coin’s value around $ 1.00. Terra critics would be attacked on social media by Kwon and his so-called “LUNAtics” army

Kwon’s promise proved worthless. A massive sale event caused Terra to “break the ball” and crash in value. The Reddit forums dedicated to Terra and Luna were for days dominated by posts referring to the National Suicide Prevention Hotline.

The emergence of Terra has defined not only retail investors but also more well-known cryptocurrency experts. A notable “Lunatic” was billionaire Mike Novogratz, who tattooed his upper arm with the word Luna and a wolf howling at the moon. Novogratz told his followers that the tattoo “will be a constant reminder that investing in venture capital requires humility.”

Michael Estrabillo attributed his crypto investments to stablegains, an investment fund that he said assured him and other investors that funds were secured in USD Coin, one of the largest stack coins. Then, on May 9, he said he was told his money was locked inside Terra.

“If I had known I was involved in an algorithm-backed currency, I would never have invested in it,” Estrabillo lamented.

Washington may also wake up to the fact that what was once an Internet and financial niche has become mainstream and can no longer be ignored.

The total value of cryptocurrencies peaked at $ 2.8 billion in November last year; it is now under $ 1.3 billion, according to CoinGecko. Studies show that approximately 16% of American adults, or 40 million people, have invested in cryptocurrencies. Pension account giant Fidelity Investments is now offering crypto as part of a 401 (k) plan. Late. Cory Booker, D-New Jersey, has repeatedly pointed out that crypto is particularly popular with black Americans, a community that has long been wary of Wall Street.

In addition, crypto has permeated popular culture. Many Super Bowl ads proclaimed crypto. Sports arenas are now named after crypto projects and the Washington National baseball team to enter into a sponsorship deal with Terra before it collapses. Celebrities regularly use crypto on social media, and YouTube personalities have generated millions of views when talking about the latest cryptoid.

The collapse of Terra was a bridge too far, it seems.

On Tuesday, Senator Kirsten Gillibrand, D-New York, and Senator Cynthia Lummis, R-Wyoming, proposed a framework to begin regulating the industry, which would include giving the Commodity Futures Trading Commission full regulatory jurisdiction over cryptocurrencies such as bitcoin and rewriting the tax code to include crypto. This would also fully regulate stack coins for the very first time.

This comes after the Biden administration’s Financial Markets Task Force released a 22-page report last November calling on Congress to pass legislation that would regulate stack coins. A recommendation contains a requirement that stablecoin issuers become banks that have sufficient liquidity reserves.

Finance Minister Janet Yellen also called for regulation of stablecoin, saying “we really need a regulatory framework to protect against risk” during a May House committee meeting.

In addition, it seems that the cryptocurrency industry – with its libertarian inclinations and deep-seated skepticism towards Washington – could also be involved.

“I think it’s a bit of a wake-up call. Many people were surprised by Terra’s failure, “said Perianne Boring, founder of the Chamber of Digital Commerce, one of the top lobbyists in the cryptocurrency industry.

SEE: Yellen calls for new rules in the midst of crypto decline

Other crypto-lobby groups, such as the Association for Digital Asset Markets, have announced their support for the Lummis-Gillibrand bill.

One idea that Washington seems to be gathering around is that issuances that issue stack coins – often used as a bridge between traditional finance and the cryptocurrency world – need to be transparent about the assets that involve them and be as liquid as any another instrument playing a key. role. in finance.

Late. Pat Toomey, R-Pennsylvania, is circulating a separate bill that requires stablecoin providers to be licensed, restrict the types of assets they carry to support these stablecoins, as well as to be routinely revised to ensure compliance.

Toomey described Terra as a “debacle,” and said in an interview that Terra’s collapse made it even more important for Washington to build security measures around stack coins. Toomey is the top Republican on the Senate Banking Committee.

“It’s always hard to get something through the Senate, but there’s nothing politically polarizing about creating a statutory regime for stack coins,” Toomey said.

After the collapse of Terra, there are two major stack coins left: USD Coin issued by the company Circle and Tether, created by the Hong Kong-based company Bitfinex. Both hold fixed assets to secure their value, but Bitfinex is less transparent about the assets it holds and has not been audited. There are also a host of smaller stablecoin issuers, which in the crypto world can become the latest hot item from one day to the next.

“It’s not just urgent for Washington to step in, it’s urgent,” Jeremy Allaire, founder and CEO of Circle, said in an interview.

Hussein reported from Washington. Michael Liedtke of San Francisco saved.

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