With crypto reeling, will new regulations help investors?

Posted: 18 May 2022 10:44 am
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In the wake of the LUNA and UST collapse, the SEC’s chairman and some senators step up the push for stricter cryptocurrency regulations.

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Securities and Exchange Commission (SEC) Chairman Gary Gensler warned investors this week that cryptocurrencies are a “highly speculative asset class”. He highlighted the lack of investor protections in this field compared to public stocks.

It’s not the first time he’s called for tighter regulation, and he’s not alone. Sen. Elizabeth Warren and Jake Chervinsky, head of policy for the Blockchain Association, were among those who joined the call for Congress to create new regulations on crypto assets.

The newest calls follow the crash last week of of Terra (LUNA) and its stablecoin TerraUSD (UST), the fallout of which wiped out billions of dollars in investors’ funds as the value of these cryptocurrencies dropped almost to nothing.

But it’s too soon to predict what regulations might be put into place, and whether they’ll help or hurt investors.

Gensler calls for stock-like protections

Gensler spoke at a FINRA conference in Washington, D.C. where he opined that crypto investors don’t get fair or deep disclosures. He has maintained cryptocurrencies should be regulated as securities, with, for example, reporting requirements on their backers and biggest holders.

“Right now, many of these entrepreneurs come up with an idea and they want to raise money from you. That puts it inside of the securities laws,” Genlser said.

Another issue that concerned Gensler was storage of cryptocurrencies on exchange platforms rather than individual “wallets.” In this case, he said, investors believe that they own the cryptocurrencies but have actually transferred their ownership to the platform. If the platform goes under, investor crypto assets might get caught up in the platform’s bankruptcy action.

This issue actually came up in the latest earnings filing from crypto broker Coinbase (COIN) just last week, contributing to the crypto market’s recent losses. (For the record, Coinbase says it faces no risk of bankruptcy.)

Other calls for regulation

Sen. Elizabeth Warren, D-Mass., called the recent LUNA and UST crash “a reminder of what happens in an unregulated market where lots of money is moving around fast, nobody has any transparency into it, and there are no rules to make sure that consumers are protected.”

Jake Chervinsky, head of policy for the Blockchain Association said last week was “among the most painful weeks in crypto history” because of the UST crash. He calls for policymakers to “fully understand these assets before making any decisions” and provide a regulatory framework to guard against the risks.

Treasury Secretary Janet Yellen told House lawmakers during a hearing last week that “[Stablecoins] present the same kind of risks that we have known for centuries in connection with bank runs.”

Sens. Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.) are drafting a comprehensive bill designed to regulate stablecoins and other tokens. Developers would have to register with the SEC before raising money via initial coin offerings (ICOs) if the bill passes, for example.

What happened in the LUNA fiasco anyway?

At its root, the LUNA collapse centered on the UST stablecoin, an algorithmic token designed to hold a $1 peg, even with the US dollar. While many stablecoins rely on stockpiles of a currency to manage the price, with UST sophisticated computer programs used other leverage including trading UST for LUNA to manage demand and price.

That system broke down as UST plunged, though, leaving UST worth only a few pennies. It also caused massive hyperinflation of LUNA that saw its supply go from around 700 million coins to over 6.9 trillion in a matter of days, destroying 99% of LUNA’s value.

The tokens’ creators have devised a plan that might include some recompense for investors. Read the details here.

Interested in cryptocurrency? Learn more about the basics with our beginner’s guide to Bitcoin, dive deeper by learning about Ethereum and see what blockchain can do with our simple guide to DeFi.

Kliment Dukovski owns cryptocurrencies as of the publishing date.

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