Crypto Crash

The Crypto Crash will Accelerate Regulatory Action

Last updated on July 14th, 2022 at 10:07 am

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In March, Jerome Powell, the head of the Federal Reserve, said that central banks “don’t know how certain digital goods will act when the market is stressed.” Powell said that it’s “easy to see” that cryptocurrencies pose risks”.

Things that have happened recently won’t make them feel better. Several well-known cryptocurrency projects found here has quickly and unexpectedly shown that many cryptocurrency products are like a house of cards.

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The sudden actions of Celsius and the forced sales of leveraged holdings caused chaos in the cryptocurrency markets. Bitcoin’s price briefly went above $20,000, but since its all-time high in November 2021, it has dropped by more than 70%.

But these problems and the recent drop in the value of cryptocurrencies could also be a great chance to find a more direct way forward. They show up because there has been steady pressure from regulators to do so.

What do the ruling bodies think about it?

In August 2021, the government started doing “sprints” with cryptocurrencies. They made plans for the following year, 2022, in the fall of 2021. The President’s Working Group on Financial Markets (PWG) released a report about the risks of stablecoins in November 2021. The report went into a lot of detail.

One of these risks was that panic like a bank run could happen. The PWG asked Congress to change the law so that only banks that have insurance could issue stablecoins. After that, in March 2022, President Biden made a decision about digital assets through an executive order.

After Terra failed, Celsius had problems, and the market as a whole fell apart, many state and federal officials spoke out about what was going on. After the Terra cryptocurrency failed, Janet Yellen, the Secretary of the U.S. Treasury, called for a “comprehensive framework” to manage stablecoins and asked Congress to take action. Then, it was said that the SEC was looking into how TerraUSD was being marketed by Terraform Labs.

We keep having the same economic problems over and over again.

The most recent market crisis shows how much money customers can lose. As a result, the value of crypto assets on the market has dropped by $2 trillion. And both Terra and Celsius are really bad examples of how bad financial engineering and too much advertising can lead to financial disasters. This has made the government realize that Terra, Celsius, and other financial disasters are similar.

At its highest point, Terra was worth about $18 billion. This was possible because it could be put into a yield protocol that allowed it to earn up to 20% interest. Michael Hsu, who is the acting Comptroller of the Currency, recently said that yield farming is like a Ponzi scheme.

This is not the first time he has said it. The Anchor Protocol said that UST depositors would get 20% returns, but if the amount of money coming in went down, there was no way to keep paying interest. Celsius used the things it had already borrowed to get more loans.

Last but not least, both Terra and Celsius made the cryptocurrency markets unstable. This was a sign of the big problems that could happen if, for example, Tether failed. Regulators work hard to make sure another financial crisis doesn’t spread as this one did.

Getting ready for it

For now, businesses that use cryptocurrency should assume that it will be regulated in the future. If the industry wants to help itself, it needs to join the conversation. But more than that, the people in charge of this business need to be willing to change how a big part of these markets work.

Regulators need to realize that not all stablecoins are the same if they want to do their jobs well. The regulators were right when they said that stablecoins come with “run risks.” They haven’t done much, though, to make stablecoins stand out from “unstable” coins.

On a larger scale, the whole industry needs to do some kind of accounting. Many people who take part in cryptocurrency markets want them to be open and not run by one person. This affects how they feel about rules that tell them what to do.

But weak items have made the damage from a drop in the crypto market happen more quickly and worse. The most powerful people in the industry should use the current “crypto winter” to get rid of dead branches that could be used to start the next fire. It’s important to admit that many things don’t meet the standards that are needed for fair and orderly markets.