Cryptocurrency Collapse is a wake-up call for many, including Congress

NEW YORK (AP) — Meltdowns in the cryptocurrency space are common, but the latter has really hit some nerves. Newbie investors have taken to online forums to share stories of decimated fortunes and even suicidal despair. Experienced crypto proponents, including a prominent billionaire, felt humbled.

When stablecoin TerraUSD imploded last month, about $40 billion worth of investor funds was wiped out – and so far little to no accountability has been made. Stablecoins are said to be the least vulnerable to big swings – hence their name – but Terra suffered a dramatic crash within days.

The Terra episode publicly revealed a long-known truth in the always-online crypto community: for every enduring digital currency, such as bitcoin, there are hundreds of failed or worthless currencies in crypto’s short history. † Thus, Terra just became the latest “sh-coin” – the term used by the community to describe coins that have fallen into obscurity.

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

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

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However, what is surprising is that the cryptocurrency industry is signaling its collaboration. Politicians, crypto enthusiasts and industry lobbyists are all pointing to the collapse of Terra and its Luna token last month as the possible end to the libertarian crypto experiment.

Stablecoins are usually pegged 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 backed by sustainable assets. Instead, founder Do Kwon promised that Terra’s proprietary algorithm would keep the coin’s value at around $1.00. Terra critics allegedly attacked on social media by Kwon and his so-called “LUNAtics” army

Kwon’s promise turned out to be worthless. A massive sell-off caused Terra to “break the ball” and crash in value. The Reddit forums devoted to Terra and Luna were dominated for days by posts referring to the National Suicide Prevention Hotline.

The rise of Terra has defined not only retail investors but more well-known cryptocurrency experts as well. One notable “crazy” 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 credited his crypto investments to stablegains, an investment vehicle that he said assured him and other investors that funds were secured in USD Coin, one of the largest stablecoins. Then, on May 9, he said he was told his money was locked up in Terra.

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

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

The total value of crypto assets peaked at $2.8 billion last November; it is now less than $1.3 billion, according to CoinGecko. Surveys show that approximately 16% of American adults, or 40 million people, have invested in cryptocurrencies. Retirement giant Fidelity Investments now offers crypto under a 401(k) plan. sen. Cory Booker, D-New Jersey, has repeatedly pointed out that crypto is especially popular among black Americans, a community that has long been wary of Wall Street.

Moreover, crypto has permeated popular culture. Many Super Bowl ads praised crypto. Sports arenas are now named after crypto projects and the Washington Nationals baseball team to sign a sponsorship deal with Terra before it collapses. Celebrities regularly use crypto on social media and YouTube personalities have generated millions of views on the latest crypto idea.

Terra’s collapse 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 regulate the industry, including giving the Commodity Futures Trading Commission full jurisdiction over cryptocurrencies such as bitcoin and rewriting the tax code to to withdraw crypto. This would also fully regulate stablecoins for the 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 stablecoins. One recommendation includes a requirement that stablecoin issuers become banks that hold adequate liquidity reserves.

Treasury Secretary Janet Yellen also called for stablecoin regulation, saying “We really need a regulatory framework to protect us from risk,” at a House committee meeting in May.

Moreover, it seems that the cryptocurrency industry – with its libertarian leanings and deep-seated skepticism towards Washington – could also be on board.

“I think that’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 cryptocurrency industry’s top lobbyists.

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

One idea Washington seems to be merging around is that issues issuing stablecoins — often used as a bridge between traditional finance and the crypto world — should be transparent about the assets involved and just as liquid as any other instrument. role. in the field of finance.

sen. Pat Toomey, R-Pennsylvania, is publishing a separate bill that requires stablecoin providers to be licensed, limit the types of assets they carry to support those stablecoins, and be routinely audited to ensure compliance.

Describing Terra as a “debacle,” Toomey said in an interview that Terra’s collapse made it even more important for Washington to build safeguards around stablecoins. Toomey is the highest-ranking Republican on the Senate Banking Committee.

“It’s always hard to get anything through the Senate, but there’s nothing politically polarizing about creating a legal regime for stablecoins,” Toomey said.

After the collapse of Terra, two major stablecoins remain: USD Coin issued by the Circle company and Tether, created by the Hong Kong-based company Bitfinex. Both have durable assets to safeguard their value, but Bitfinex is less transparent about the assets it owns and is not monitored. There are also plenty of smaller stablecoin issuers, which could become the latest hot item in the crypto world overnight.

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

Hussein reported from Washington. Michael Liedtke rescued in San Francisco.

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