Opinion: Crypto cannot rely on the government to save it from itself

Cryptocurrency lender Voyager Digital also recently filed for bankruptcy protection. Ordinary investors who have deposited their money on Voyager probably don’t know if or when they will review their funds. Bitcoin, meanwhile, recently dropped more than 70% from its all-time high from last year.
And as early as May, TerraUSD (UST), a so-called stablecoin that was supposed to be trading at $ 1, saw its price drop well below, causing heavy losses for those who held it or its sister currency Luna (the value di Luna was linked to UST).

The underlying problem is a combination of risky lending, poor risk management, and dull finances. So when cryptocurrency prices plummeted, possibly due to fears of rising inflation and the possibility of a recession, some cryptocurrency companies didn’t have the capital to cushion the blow. The result has been the disappearance of billions of dollars in value, often with ordinary investors paying the price.

Cryptocurrencies like Bitcoin should be independent of any government. But we have now reached the point where stronger government regulation of the cryptocurrency industry is both necessary and inevitable. At the same time, the industry cannot simply wait for the government to take action. Cryptocurrency companies also need to try to better supervise themselves.

This starts by providing more transparency. While transparency is one of the core ideals of blockchain technology – all transactions on the Bitcoin blockchain are visible to the whole world, for example – some cryptocurrency companies are surprisingly opaque. In the case of Celsius, the Vermont Department of Financial Regulation said that “clients have not received critical information about its financial condition, investment activities, risk factors and ability to repay their obligations to depositors. and other creditors “. At the very least, businesses need to put much clearer warning labels on their products that describe the risks of depositing or investing with them, as well as more information on how customer deposits are used.

With stronger regulation, the Celsius situation may have turned out differently. His model essentially consisted of taking user deposits and using them for risky, illiquid investments, and users enjoyed high interest rates in exchange. Celsius essentially acted like a bank, with no regulatory protections or FDIC insurance.

“Prudential regulation, such as that applied to banks, would almost certainly have avoided many of the problems in our industry,” Caitlin Long, CEO of custody bank Cassa Bank, said in an interview. “Prudential capital requirements, investment restrictions, background checks on all executives, annual supervisory reviews – all of these things don’t apply to the cryptocurrency industry. They do apply to banks, though.”

However, this kind of regulatory review won’t come anytime soon. That’s why both venture capitalists and ordinary investors should push companies to be more transparent and accountable, requiring audits and disclosures on lending practices and capital buffers. When cryptocurrency prices were skyrocketing, few took a look at these companies’ business practices.

The same was true of the UST stablecoin. When the market was strong, few publicly pointed to what are now obvious red flags, and those who did risk being scolded by cryptocurrency enthusiasts on social media. Now, the UST’s dramatic collapse could accelerate stablecoin regulation in the United States.
There are widespread concerns that some of the major stablecoins are not as stable as they claim to be. The fear is that if investors en masse decide to redeem their coins with the US dollars allegedly backing them, the stablecoin issuer would not have enough liquidity on hand to fulfill these orders. US lawmakers were reportedly getting closer to a bipartisan deal to regulate stablecoins, but consideration for the bill was postponed until after August. The bill, which is not yet public, would treat stablecoin issuers more like banks and subject them to federal oversight. It would also include stringent requirements for assets that support a stablecoin.
Another bill of Sens. Cynthia Lummis and Kirsten Gillibrand aims to bring greater regulatory clarity in general by creating a standard for deciding which digital assets are commodities and which titles. This would help clarify which activities are regulated by the Commodity Futures Trading Commission versus the Securities and Exchange Commission.
Opinion: The painful market selloff should end soon

A clearer and more consistent regulatory framework on what companies can and cannot do, as well as which federal agency regulates which digital assets, could offer greater safeguards for ordinary investors.

Hester Peirce, a commissioner for the SEC, has long advocated greater regulatory clarity. “If we had decided that cryptocurrency lending is an area where we can involve securities laws, we could have sat down a long time ago and set some rules that made sense,” she said in an interview, speaking on a personal basis.

Instead, what is often achieved is regulation through enforcement, where companies are punished retrospectively. One of the problems with these one-time enforcement actions is that they don’t necessarily cover the entire cryptocurrency landscape.

“Not only is this not particularly fair, because sometimes executive actions come late, and sometimes it’s a question of ‘why did you go with this project instead of this project’, but also because it allows people who are really doing bad things to get lost in the mix, ā€¯Peirce said.

These proposals are all steps in the right direction to start a serious conversation about cryptocurrency regulation. But given Washington’s other priorities, it’s unclear when the new regulations will come into effect or how they’ll look in their final form.

Smart regulation is needed, but it will not be enough. Cryptocurrency innovation is moving faster than any government’s attempt to curb it. Political negotiations can also delay the approval of the accounts. Furthermore, with each new crisis, the cryptocurrency loses more credibility. This could lead regulators to crack down harder than they otherwise would, stifling innovation in an ever-changing field. An industry that prides itself on decentralization should not rely on government to save itself.

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