WASHINGTON — Cryptocurrency investors lost hundreds of billions of dollars last week amid a sell-off in digital assets and other riskier investments.
The crash is a Told You So moment for crypto critics who said the industry needed tougher regulation in order to protect consumers. Some apparent investors have published desperate posts on Reddit to lose their savings.
“We have an unregulated system where people were speculating a lot about things they didn’t really understand,” said Todd Phillips, financial regulation expert at the liberal Center for American Progress. “And we’re seeing a giant market correction that’s hurting a lot of people.”
Sen. Elizabeth Warren (D-Mass.) called the crash “a reminder of what happens in an unregulated market where a lot of money is moving fast, nobody has any transparency about it and there’s no no rules to ensure consumers are protected.”
Even crypto boosters have recognized the need for closer scrutiny of the industry. Jake Chervinsky, chief policy officer of the Blockchain Association, the leading industry lobby group in Washington, recognized on Twitter that the past week was “among the most painful weeks in crypto history” and endorsed calls for Congress to intervene.
But what the reform looks like is an open question, as many legislators are still unfamiliar with crypto and its associated jargon – and many members who do know the jargon seem to want to pamper the industry.
Cryptocurrencies aren’t really currencies, although their proponents insist they could one day be widely used in commerce. For now, these are just digital assets used primarily for speculative investments based on blockchain technology. Instead of going through an intermediary such as a bank, blockchain technology works by linking a network of peer computers.
This month’s liquidation – which saw the industry Overall value falling from $1.8 trillion to $1.1 trillion last week – was all the more notable as it involved the failure of a so-called stablecoin. Stablecoins are supposed to be less volatile, with a one-to-one ratio to the value of a dollar. But a stablecoin called Terra collapsed altogether, and another called Tether also briefly lost its peg, as panicked investors sold their holdings amid an apparent crisis of confidence in the tokens’ ability to hold their value. .
The Biden administration has said only insured depository institutions like banks should be able to issue stablecoins, rather than random tech companies. Terra was created by a South Korean company called Terraform Labs.
“They present the same kind of risks that we’ve known for centuries when it comes to bank runs,” Treasury Secretary Janet Yellen told House lawmakers during a hearing on Thursday. “These are assets that claim to guarantee at will conversion of the dollar on a 1 to 1 basis.”
Banks are required to hold assets in reserve in case of unexpected demand from depositors, and the federal government insures deposits up to a certain amount. Terra has seen exactly the kind of run the federal banking rules are designed to prevent.
Chervinsky said he supports more permissive proposals from Rep. Josh Gottheimer (DN.J.) and Sen. Pat Toomey (R-Pa.) that would allow non-banks to issue stablecoins.
Toomey and other Republicans, such as Rep. Patrick McHenry (RN.C.), have pointed out that not all stablecoins are the same. Terra was backed by an algorithm instead of actual reserve assets.
“It seems entirely possible to me that Terra’s design is fundamentally unstable,” Toomey told HuffPost.
Toomey and Gottheimer represent a sort of bipartisan consensus among a handful of crypto enthusiasts on the Hill that new legislation should protect the industry rather than suppress it. In addition to his stablecoin bill, Gottheimer co-sponsored legislation that would exempt crypto tokens from securities laws.
The Securities and Exchange Commission has filed dozens of enforcement actions against issuers of digital assets, prompting “regulation by enforcement” complaints from industry players and their supporters in Congress.
Meanwhile, the senses. Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (DN.Y.) are drafting a more comprehensive bill that would also regulate stablecoins and other tokens. Crypto developers who raise money through “initial coin offerings,” for example, would need to register with the SEC, just like any company selling shares to the public.
Lummis said the bill will drop this month. She said if the rules she and Gillibrand envisioned had been in place, this month’s crash wouldn’t have happened.
Lummis and Toomey are the only senators with cryptocurrency assets, review of disclosure forms shows by The Wall Street Journal. Lummis said if she wasn’t a senator, she would go buy more Bitcoin in the wake of last week’s plunge.
“You can buy it at a discount right now,” she said.
Phillips argued that existing banking and securities laws, which have been in effect since shortly after the Great Wall Street Crash of 1929, already cover most of what happens in the crypto industry.
Securities laws require companies to disclose basic details of their business to potential investors; some crypto projects don’t even disclose the names of the people behind them.
“A lot of what’s out there is covered by these laws,” Phillips said. “It’s just that the laws were not respected.”
Igor Bobic contributed reporting.
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