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The state of cryptocurrency is precarious. Crypto lender, Celsius, submitted a bankruptcy petition last month. It has halted withdrawals since June 12; it is unknown if or when users will receive their money back. But Celsius is merely the first piece to collapse.
Voyager Digital, a cryptocurrency lender, recently filed for bankruptcy protection. The average investor who deposited their money with Voyager is probably unsure of if or when they will see their money again. In contrast, the price of bitcoin has just dropped more than 70% from its record high from last year.
Additionally, back in May, TerraUSD (UST), a so-called stablecoin that was expected to trade at $1, saw its price drop far below that level, resulting in significant losses for anyone holding it or its sister coin, Luna (whose value was correlated to UST).
Risky loans, subpar risk management, and ambiguous finances combine to cause the issue. Because of this, several cryptocurrency companies lacked the money to absorb the shock when cryptocurrency prices plummeted, probably as a result of worries about growing inflation and the prospect of a recession. As a result, value worth billions of dollars has been lost, frequently at the expense of regular investors.
The idea behind cryptocurrencies like Bitcoin is that they are unregulated by any authority. However, the time has come when more stringent government oversight of the cryptocurrency sector is both essential and unavoidable. The industry cannot, however, passively wait for the government to take action. Additionally, cryptocurrency businesses need to work on self-policing.
Increasing transparency is the first step in doing that. While one of the fundamental principles of blockchain technology is openness, some crypto firms are startlingly opaque. For instance, all transactions on the Bitcoin blockchain are visible to everyone.
The Celsius issue might have developed differently with tighter regulation. Users received high interest rates in exchange for their deposits, which were primarily used for hazardous and illiquid investments. Without the necessary legal safeguards or FDIC insurance, Celsius was virtually operating as a bank.
However, it is unlikely that such a regulation rewrite will occur soon. The demand for audits and disclosures about lending practices and capital reserves should be made by both venture capitalists and regular investors in order to pressure businesses to be more open and accountable. Few people closely examined these companies’ business procedures when cryptocurrency values were sky-high.
The UST stablecoin was no different. Few people raised what are now clear caution signs in public during the bull market, and those who did ran the danger of being yelled down by cryptocurrency fans on social media. Stablecoin regulation in the US could now be accelerated by the abrupt collapse of UST.
Attempts to regulate Crypto
Many people are worried that some of the most popular stablecoins are not quite as stable as they claim to be. The worry is that the stablecoin issuer wouldn’t have enough cash on hand to fulfill these orders if investors made a mass decision to exchange their coins for the supposedly backed US dollars. A bipartisan agreement to regulate stablecoins was allegedly close to being reached by US senators, but the bill’s consideration has been postponed until August. Stablecoin issuers would be treated more like banks and be under federal oversight under the measure, which is still secret. It would also set tight criteria for the assets used to support stablecoins.
By establishing a standard for determining which digital assets are commodities and which are securities, a different bill by Senators Cynthia Lummis and Kirsten Gillibrand seeks to improve regulatory clarity overall. That would make it more clear which assets fall under the Securities and Exchange Commission’s purview and which are under the Commodity Futures Trading Commission’s.
Greater protections for regular investors may result from a regulatory structure that is more transparent and uniform in terms of what businesses can and cannot do, as well as which federal agency is in charge of overseeing specific digital assets.
Instead, you frequently encounter regulation through enforcement, in which businesses are penalized after the event. The fact that these one-time enforcement efforts don’t necessarily cover the entire crypto ecosystem is one of its issues.
To begin a real discussion on cryptocurrency regulation, all of these proposals are positive steps. New restrictions would likely go into force at some point, but it’s unclear when or how because of other priorities in Washington.
Smart regulation is required, but it won’t be sufficient. Innovation in the cryptosphere advances quicker than any government’s attempts to control it. Bill passage may also be delayed by political negotiations. Furthermore, the legitimacy of cryptocurrencies continues to decline with each new catastrophe. This could prompt regulators to impose stricter penalties than they otherwise would have, which would stifle innovation in a still-evolving industry. An industry that takes pride in its decentralization shouldn’t rely on the government to save it from going under.
Opinions expressed by California Gazette contributors are their own.