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There is an existential crisis in cryptocurrency. Celsius, a crypto lender, submitted a bankruptcy petition last month. Since June 12, withdrawals have been suspended, and it’s unknown whether or when users will receive their money back. But Celsius is only the first domino to drop.
Voyager Digital, a cryptocurrency lender, recently filed for bankruptcy as well. The majority of regular investors who put money into Voyager are probably unsure of if or when they will see their money again. In contrast, Bitcoin has just lost more than 70% of its value from its peak last year.
Furthermore, in May, TerraUSD (UST), a purported stablecoin that was scheduled to trade at $1, saw its price drop far below that level, resulting in significant losses for anyone who owned it or its sister coin, Luna (Luna’s value was correlated to UST).
Risky lending, inadequate risk management, and murky finances are the root causes of the issue. Therefore, several cryptocurrency companies lacked the money to absorb the shock when crypto values plummeted, probably as a result of worries about growing inflation and the potential for a recession. As a result, billions of dollars in value have vanished, frequently at the expense of regular investors.
Bitcoin and other cryptocurrencies are said to be unregulated by any authority. But at this point, more stringent government oversight of the cryptocurrency sector is both required and unavoidable. However, businesses cannot simply wait for the government to take action. The self-policing efforts of cryptocurrency companies must be improved.
More transparency must be provided as a start. While one of the fundamental principles of blockchain technology is transparency—all transactions on the Bitcoin blockchain, for instance, are visible to everyone—some cryptocurrency companies are startlingly opaque.
Stronger regulation might have resulted in a different outcome in the Celsius case. Its business model basically consisted of taking user deposits and using them for hazardous and illiquid investments while rewarding consumers with high interest rates. Without the FDIC insurance or the protection of the regulatory system, Celsius was virtually operating as a bank.
However, it is unlikely that this kind of regulatory reform will occur anytime soon. Because of this, both venture capitalists and regular investors should pressure businesses to be more open and accountable and demand audits and disclosures on lending policies and capital reserves. Few people examined these organizations’ business operations in-depth when cryptocurrency prices were at all-time highs.
The stablecoin UST experienced a similar situation. Few people publicly brought up what are now clear red flags while the market was strong, and those who did ran the danger of being yelled down by crypto fans on social media. The sudden and abrupt collapse of UST may speed up stablecoin regulation in the US.
The fact that some of the most popular stablecoins are not nearly as stable as they claim to be is a source of great concern. The concern is that the stablecoin issuer wouldn’t have enough cash on hand to execute these demands if investors opted to redeem their coins in bulk for the US dollars that are intended to back them.
Attempts to regulate Crypto over time
According to reports, US senators were nearing a bipartisan agreement to regulate stablecoins, but the bill’s consideration has been postponed until August. The unpublished measure would treat stablecoin issuers more like banks and put them under federal control. Additionally, it would include stringent specifications for the assets used to support stablecoins.
Sens. Cynthia Lummis and Kirsten Gillibrand have introduced another bill that would establish a standard for determining which digital assets are securities and which are commodities in order to increase regulatory clarity overall. That would make it clearer which assets are governed by the Securities and Exchange Commission versus the Commodity Futures Trading Commission.
Greater investor safeguards might result from a regulatory framework that is clearer and more uniform in terms of what businesses can and cannot do, as well as which federal agency is in charge of overseeing particular digital assets.
Instead, what you frequently see is enforcement-based regulation, where businesses are penalized after the event. These one-off enforcement operations have the drawback of not necessarily encompassing the entire crypto environment.
All of these ideas are positive beginnings toward kicking off a meaningful discussion regarding cryptocurrency regulation. However, it’s unclear when such laws would go into effect or what they would look like in their ultimate form, given other priorities in Washington.
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Although prudent regulation is required, it won’t be sufficient. The development of cryptocurrencies outpaces any attempts by governments to control them. The passage of legislation can also be delayed by political negotiations. Furthermore, cryptocurrency continues to lose credibility with each new catastrophe. Regulators may become more aggressive than they otherwise would have been as a result, which could stifle innovation in a field that is still developing. A sector that values decentralization shouldn’t look to the government to save it from itself.