The meltdown of cryptocurrency is a wake-up call for many, including Congress

NEW YORK (AP) – Meltings in the cryptocurrency area are common, but the latter really touched some nerves. Novice investors took to online forums to share stories of decimated fortunes and even suicidal ideation. Experienced crypto supporters, including a prominent billionaire, felt humbled.

When stablecoin TerraUSD imploded last month, an estimated $ 40 billion in investor funds was wiped out – and so far there has been little or no accountability. Stablecoins are meant to be less vulnerable to large fluctuations – hence the name – but Terra had a spectacular collapse in a matter of days.

The Terra episode publicly revealed a truth that has long been known in the crypto community that is always online: for every digital currency with endurance, like bitcoin, there have been hundreds of failed or worthless currencies in the short history of crypto. So Terra became just the last “sh-coin” term used by society to describe coins that had faded into obscurity.

Terra’s rapid collapse came just as bitcoin, the most popular cryptocurrency, was in the midst of a downturn that has wiped out almost half of its value in a few months. The events have served as a living reminder that investors, both professionals and the mother and pop variant, can roll the dice when it comes to putting money into digital assets.

After being mostly hands-off against crypto, it seems that Washington has had enough. On Tuesday, two senators – a Democrat and a Republican – proposed legislation seeking to build a regulatory framework around the cryptocurrency industry; other members of Congress are considering more limited legislation.

SEE: Conventional economists sound the alarm over the volatility of cryptocurrency

What is surprising, however, is that the cryptocurrency industry signals its cooperation. Politicians, crypto enthusiasts and industry lobbyists all point to last month’s collapse of Terra and its token Luna as the possible end to the libertarian experiment in crypto.

Stablecoins are usually linked to a traditional financial instrument, such as the US dollar, and are meant to have cryptocurrency equivalent to investing in a conservative money market fund. But Terra was not supported by any hard assets. Instead, founder Do Kwon promised that Terra’s proprietary algorithm would keep the coin’s value tied at about $ 1.00. Critics of Terra would be attacked on social media by Kwon and his so-called army of “LUNAtics”

Kwon’s promise proved worthless. A massive sales event caused Terra to “break the money” and collapse in value. Reddit boards dedicated to Terra and Luna were dominated for several days by posts referring to the National Suicide Prevention Hotline.

Terra’s rise attracted not only retail investors, but also better-known cryptocurrency experts. A notable “Lunatic” was billionaire Mike Novogratz, who tattooed his upper arm with the word Luna and a wolf howling at the moon. Novogratz told his followers that the tattoo “will be a constant reminder that venture investment requires humility.”

Michael Estrabillo entrusted his crypto investments to stablegains, an investment fund that he says had assured him and other investors that the funds were secured in USD Coin, one of the largest stackcoins. Then, on May 9, he said he was informed that his money was locked up in Terra.

“Had I known I was involved in a currency backed by an algorithm, I would never have invested in it,” Estrabillo lamented.

Washington may also wake up to the fact that what was once the niche of the internet and finance has become mainstream and can no longer be ignored.

The total value of cryptocurrencies peaked at $ 2.8 trillion in November last year; it is now below $ 1.3 trillion, according to CoinGecko. Surveys show that approximately 16% of adult Americans, or 40 million people, have invested in cryptocurrencies. Pension account giant Fidelity Investments now offers crypto as part of a 401 (k) plan. Sen. Cory Booker, D-New Jersey, has repeatedly pointed out that crypto is especially popular with black Americans, a community that has long distrusted Wall Street.

Furthermore, crypto has permeated popular culture. Numerous Super Bowl ads spied crypto. Sports arenas are now named after crypto projects, and the Washington National baseball team took a sponsorship deal from Terra before it collapsed. Celebrities routinely shuffle crypto on social media, and YouTube personalities generate millions of views talking about the latest crypto idea.

Terra’s collapse was a bridge too far, it seems.

On Tuesday, Senator Kirsten Gillibrand, D-New York, and Senator Cynthia Lummis, R-Wyoming, proposed a framework to begin regulating the industry, which will include giving the Commodity Futures Trading Commission full regulatory jurisdiction over cryptocurrencies such as bitcoin and rewriting the tax code for to include crypto. It will also fully regulate stack coins for the first time ever.

This comes after the Biden administration’s working group for financial markets published a 22-page report in November last year, in which they asked Congress to pass legislation that will regulate stable coins. One recommendation includes a requirement that stablecoin issuers become banks that will have sufficient cash reserves.

Finance Minister Janet Yellen has also called for regulation of stablecoin, saying “we really need a regulatory framework to protect against the risks,” during a meeting of the House Committee in May.

Furthermore, it seems that the cryptocurrency industry – with its libertarian inclinations and deep skepticism of Washington – can also be involved.

“I think this is a bit of a wake-up call. Many people were surprised by Terra’s failure, “said Perianne Boring, founder of the Chamber of Digital Commerce, one of the leading lobbyists in the cryptocurrency industry.

SEE: Yellen calls for new regulations in the midst of the crypto decline

Other crypto-lobby groups, such as the Association for Digital Asset Markets, have announced support for the Lummis-Gillibrand bill.

One idea that Washington seems to be gathering around is that units that issue stack coins – often used as a bridge between traditional finance and the cryptocurrency world – must be transparent about the assets that support them and be as liquid as any other instrument that plays a key role. in finance.

Sen. Pat Toomey, R-Pennsylvania, is circulating a separate bill that will require stablecoin providers to have a license to operate, limit the types of assets they have to support these stable currencies, and be subject to routine audits to ensure compliance. .

Toomey described Terra as a “debacle”, and said in an interview that Terra’s collapse made it even more important for Washington to build some roadblocks around stack coins. Toomey is the top Republican on the Senate Banking Committee.

“It’s always difficult to get something over the finish line in the Senate, but there’s nothing politically polarizing about creating a statutory regime for stable coins,” Toomey said.

After the collapse of Terra, there are two remaining large stable coins: USD Coin issued by the company Circle, and Tether, created by the Hong Kong-based company Bitfinex. Both have hard assets to support the value, but Bitfinex is less transparent about the assets it has and will not be audited. There are also a number of smaller stablecoin issuers, which in the cryptocurrency world could be the last hot item overnight.

“It’s not just urgent that Washington comes in, it’s urgent,” Jeremy Allaire, founder and CEO of Circle, said in an interview.

Hussein reported from Washington. Michael Liedtke of San Francisco contributed.