Opinion: Cryptocurrencies cannot rely on the government to save them from themselves

Crypto lender Voyager Digital also recently filed for bankruptcy protection. Ordinary investors who deposited their money in Voyager likely won’t know if they will ever see their money again. Meanwhile, bitcoin has recently fallen more than 70% from its all-time high compared to last year.
Back in May, TerraUSD (UST), the so-called Stablecoin that was supposed to be trading at $1, saw its price drop well below that, causing huge losses to those who held it or its sister currency, Luna (linked to Luna value in UST).

The underlying problem is a combination of risky lending, poor risk management, and opaque financing. So when cryptocurrency prices collapsed, likely out of fears of rising inflation and the possibility of a recession, some crypto companies didn’t have the capital to cushion the blow. The result has been the disappearance of billions of dollars in value, and ordinary investors often pay the price.

Cryptocurrencies like Bitcoin are supposed to be independent of any government. But we have now reached the point where strong government regulation of the cryptocurrency industry is both necessary and inevitable. At the same time, the industry cannot wait for the government to act. Cryptocurrency companies should also try to adjust themselves better.

This starts with providing more transparency. While transparency is one of the core tenets of blockchain technology — all transactions on the Bitcoin blockchain can be seen by the world, for example — some crypto companies are strikingly opaque. In Celsius’ case, the Vermont Department of Financial Regulation said that “clients did not receive significant disclosures about their financial conditions, investment activities, risk factors, and ability to pay their obligations to depositors and other creditors.” At the very least, companies need to put more clear warning labels on their products outlining the risks of depositing or investing with them, as well as more information about how customer deposits are used.

With a stronger regulation, the centenary situation might have been done differently. Its model was basically to take users’ deposits and use them for risky and illiquid investments, users enjoying high interest rates in return. Celsius was essentially operating as a bank, without regulatory protection or FDIC insurance.

“It was almost certain that prudential regulations, such as those that apply to banks, would prevent many problems in our sector,” Caitlin Long, chief executive of depository Custodia Bank, said in an interview. “Precautionary capital requirements, investment restrictions, background checks for all executives, annual supervisory exams – all of these things do not apply to the crypto industry. However, they do apply to banks.”

However, this type of regulatory reform is not likely to come any time soon. That’s why venture capitalists and ordinary investors alike should push companies for greater transparency and accountability, and demand audits and disclosures about their lending practices and capital reserves. When cryptocurrency prices were so high, few took a closer look at the business practices of these companies.

The same was true with the stable UST. When the market was strong, few publicly pointed to the now obvious red flags, and those who risked getting yelled at by crypto enthusiasts on social media. Now, the dramatic collapse of UST could accelerate stablecoin regulation in the US.
There are widespread concerns that some of the leading stablecoins are not nearly as stable as they claim. The fear is that if investors collectively decide to exchange their coins for the US dollars that are supposed to support them, the stablecoin issuer will not have enough cash to meet these demands. It was reported that US lawmakers were nearing a bipartisan deal to regulate stablecoins, but consideration of the bill was delayed until after August. The bill, which has not yet been released to the public, would treat stablecoin issuers like banks and subject them to federal oversight. It will also include stringent requirements for assets that support a stablecoin.
Another bill by Senators Cynthia Loomis and Kirsten Gillibrand aims to bring more overall regulatory clarity by creating a standard for determining which digital assets are commodities and which are securities. This will help clarify which assets are regulated by the Commodity Futures Trading Commission versus the Securities and Exchange Commission.

A clearer and more consistent regulatory framework on what companies can and cannot do, as well as the federal agency that regulates digital assets, could provide greater protection for ordinary investors.

Hester Pierce, a commissioner with the Securities and Exchange Commission, has long argued for greater regulatory clarity. “If we decided that crypto lending was an area in which we could implicate securities laws, we would probably have sat down a long time ago and made some rules around that makes sense,” she said in an interview, speaking in her personal capacity. .

Instead, what you often get is regulation by enforcement, where companies are punished after the fact. One problem with one-time enforcement actions is that they do not necessarily cover the entire crypto landscape.

“Not only is this particularly unfair, because sometimes the enforcement action comes in late, and sometimes the question is ‘Why should I pursue this project instead of this project,’ but also because it allows people who do bad things to get lost in the shuffle, Pierce said.

These suggestions are all steps in the right direction to start a serious conversation about crypto regulation. But given Washington’s other priorities, it’s unclear when the new regulations will take effect or what they will look like in their final form.

Smart regulation is necessary, but it will not be sufficient. Cryptocurrency innovation is moving faster than any government is trying to rein it in. Political negotiations can also delay the passage of bills. Moreover, with each new crisis, the cryptocurrency loses more credibility. This could lead to regulators taking more drastic action than they would otherwise, stifling innovation in a field that is still developing. An industry that prides itself on decentralization should not rely on government to save itself.

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