Opinion: Crypto Needs No Input From the Government

The future of cryptocurrency is in doubt. Celsius, a crypto lender, submitted a bankruptcy filing last month. Since June 12, withdrawals have been suspended, and it is unknown whether or when consumers will receive their money back. However, Celsius is only the first domino to drop.

Voyager Digital, a cryptocurrency lender, has filed for bankruptcy protection as well. Ordinary investors who invested their money with Voyager are probably unsure about whether or when they will see their money again. In contrast, the price of bitcoin has just dropped more than 70% from its peak last year.

And in May, TerraUSD (UST), a so-called stablecoin that was scheduled to trade at $1, saw its price fall far below that, resulting in significant losses for anyone who held it or its sister coin, Luna (Luna’s value was linked to UST).

Risky loans, subpar risk management, and hazy finances combine to cause the issue. Therefore, several crypto firms lacked the capital to absorb the shock when cryptocurrency prices plummeted, probably as a result of worries about growing inflation and the potential for a recession. As a result, billions of dollars’ worth of value have vanished, frequently at the expense of regular investors.

Bitcoin and other cryptocurrencies are designed to be unregulated by any authority. But at this point, more stringent government oversight of the cryptocurrency sector is both essential and unavoidable. Nevertheless, businesses cannot simply wait for the government to take action. Additionally, cryptocurrency businesses must make an effort to properly police themselves.

More transparency is the first step in accomplishing that. 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 businesses are startlingly opaque.

Stronger regulation might have resulted in a different outcome in the Celsius scenario. Users received high interest rates in exchange for their deposits, which were mostly used for hazardous and illiquid ventures. Without the necessary legal safeguards or FDIC insurance, Celsius was virtually functioning as a bank.

However, it is unlikely that this kind of regulatory reform will occur soon. Because of this, both venture capitalists and regular investors should pressure businesses to be more transparent and accountable by demanding audits and disclosures about lending policies and capital reserves. Few people closely examined these companies’ business operations when cryptocurrency values were at all-time highs.

The same applies to the stablecoin UST. Few people publicly brought up what are now clear caution flags during the bull market, and those who did ran the danger of being yelled down by crypto fans on social media. UST’s abrupt decline may speed up stablecoin regulation in the US.

Attempts to regulate Crypto

Many people worry that some of the most popular stablecoins are not nearly as stable as they claim to be. The concern is that the stablecoin issuer would not have enough cash on hand to execute these demands if investors wanted to redeem their coins in bulk for the US dollars that are intended to support them. A bipartisan agreement to regulate stablecoins was apparently nearing completion among US politicians, but the bill’s consideration has been postponed until August. The law, which is not yet public, would treat stablecoin issuers more like banks and subject them to federal monitoring. It would also have stringent rules for the assets used to support stablecoins.

Sens. Cynthia Lummis and Kirsten Gillibrand have introduced a second 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 more clear which assets are governed by the Securities and Exchange Commission versus the Commodity Futures Trading Commission.

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Greater investor safeguards might result from a regulatory framework that is more precise and uniform in terms of what businesses can and cannot do, as well as which government agency is in charge of overseeing particular digital assets.

Instead, you frequently encounter enforcement-based regulation, in which businesses are penalized after the event. These sporadic enforcement measures have the drawback of not necessarily encompassing the entire crypto environment.

All of these ideas are positive steps toward launching a meaningful discussion regarding cryptocurrency regulation. However, it’s unclear when such restrictions would go into force or what they would look like in their ultimate form due to other priorities in Washington.

Smart regulation is required, but it won’t suffice. Innovation in the cryptosphere advances more quickly than any government’s attempts to control it. The passage of legislation may also be delayed by political negotiations. Additionally, cryptocurrency continues to lose credibility with each new catastrophe. Regulators may become more aggressive than they otherwise would have been as a result, which might stifle innovation in a still-evolving industry. An industry that takes pride in its decentralization shouldn’t go to the government to save it from itself.