By KEN SWEET and FATIMA HUSSEIN, Associated Press
NEW YORK (AP) — Meltdowns in the cryptocurrency space are common, but the latest has really touched some nerves. Novice investors have taken to online forums to share stories of decimated fortunes and even suicidal desperation. Experienced crypto proponents, including a prominent billionaire, felt humbled.
When stablecoin TerraUSD imploded last month, around $40 billion in investor funds were wiped out – and so far there has been little to no accountability. Stablecoins are supposed to be less vulnerable to large swings – hence their name – but Terra suffered a dramatic crash in a matter of days.
The Terra episode exposed a long-known truth in the crypto community: for every enduring digital currency, like bitcoin, there have been hundreds of bankrupt or worthless currencies over the years. Thus Terra became just the latest “sh-coin” – the term used by the community to describe coins that have faded into obscurity.
Terra crashed just as bitcoin, the most popular cryptocurrency, was in the midst of a decline that wiped out almost half of its value within months. Events have been a stark reminder that investors, whether professional or not, can roll the dice when it comes to investing in digital assets.
After being mostly indifferent to crypto, it seems Washington has had enough. On Tuesday, two senators proposed legislation to create a regulatory framework around the cryptocurrency industry; other members of Congress are considering more limited legislation.
What is surprising, however, is that the cryptocurrency industry is signaling its cooperation. Politicians, crypto enthusiasts, and industry lobbyists are all pointing to the collapse of Terra and its Luna token last month as the possible end of the libertarian crypto experiment.
Stablecoins are usually pegged to a traditional financial instrument, like the US dollar, and are meant to be the cryptocurrency equivalent of investing in a conservative money market fund. But Terra was not backed by any sustainable assets. Instead, its founder Do Kwon promised that Terra’s proprietary algorithm would keep the coin’s value at around $1.00. Terra critics would be attacked on social media by Kwon and his so-called “LUNAtics” army
Kwon’s promise turned out to be worthless. A massive sell-out event caused Terra to “break the ball” and crash. The Reddit forums dedicated to Terra and Luna were dominated for days by posts referencing the National Suicide Prevention Hotline.
The rise of Terra has attracted not only retail investors, but also more well-known cryptocurrency experts. Billionaire Mike Novogratz, notable in “Lunatic”, got the word Luna and a wolf howling at the moon tattooed on his arm. Novogratz told his followers that the tattoo “will be a constant reminder that investing in venture capital requires humility.”
Michael Estrabillo entrusted his crypto investments to stablegains, an investment vehicle which he said assured him and other investors that the funds were secured in USD Coin, one of the largest stablecoins, and backed by sustainable assets. Then, on May 9, he said he was told his money was locked up in Terra.
“If I had known I was involved in an algorithm-backed currency, I would never have invested in it,” Estrabillo lamented.
Washington is also raising awareness that what was once an internet and finance niche has become mainstream and can no longer be ignored.
The total value of crypto assets peaked at $2.8 trillion last November; it is now below $1.3 trillion, according to CoinGecko. Surveys show that around 16% of American adults, or 40 million people, have invested in cryptocurrencies. Retirement account giant Fidelity Investments now offers crypto under a 401(k) plan. Sen. Cory Booker, D-New Jersey, has repeatedly pointed out that crypto is especially popular among black Americans, a community that has long been wary of Wall Street.
Additionally, crypto has permeated popular culture. Many Super Bowl ads touted crypto. Sports arenas are now named after crypto projects, and the Washington Nationals baseball team struck a sponsorship deal with Terra before it collapsed. Celebrities regularly use 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 though.
On Tuesday, Sen. Kirsten Gillibrand, D-New York, and Sen. Cynthia Lummis, R-Wyoming, proposed a framework to begin regulating the industry, which would include giving the Commodity Futures Trading Commission full regulatory jurisdiction over cryptocurrencies such as bitcoin and rewrite the tax code to include crypto. This would also fully regulate stablecoins for the very first time.
Plus, it looks like the cryptocurrency industry — with its libertarian leanings and deep skepticism of Washington — could also be on board.
“I think it’s a bit of a wake-up call. A lot of people were surprised by the failure of Terra,” said Perianne Boring, founder of the Chamber of Digital Commerce, one of the leading lobbyists for the cryptocurrency industry.
One idea Washington seems to be coalescing around is that entities that issue stablecoins — often used as a bridge between traditional finance and the crypto world — should be transparent about the assets that back them and be as liquid as any other. instrument playing a key role. in finance.
Sen. Pat Toomey, R-Pennsylvania, is circulating a separate bill that would require stablecoin providers to have a business license, restrict the types of assets they carry to support those stablecoins, as well as be routinely audited to ensure compliance.
Describing Terra as a “debacle,” Toomey said in an interview that Terra’s collapse made it even more important for Washington to build safeguards around stablecoins. Toomey is the top Republican on the Senate Banking Committee.
“It’s always difficult to get anything through the Senate, but there’s nothing politically polarizing about creating a statutory regime for stablecoins,” Toomey said.
After the collapse of Terra, there are two major stablecoins left: USD Coin issued by the company Circle and Tether, created by the Hong Kong-based company Bitfinex. Both hold durable assets to safeguard their value, but Bitfinex is less transparent about the assets it holds and is unaudited. There are also a host of smaller stablecoin issuers, which in the crypto world could become the latest hot item overnight.
“It’s not just urgent for Washington to step in, it’s urgent,” Jeremy Allaire, founder and CEO of Circle, said in an interview.
Hussein reported from Washington. Michael Liedtke in San Francisco contributed.
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