The crypto crash that vaporized roughly $500 billion in market value over the last two weeks is refocusing Washington policymakers’ attention — fast-tracking the desire to set federal rules for the freewheeling industry.
Financial watchdogs are zeroing in on stablecoins, the subset of cryptocurrencies meant to offer traders a safe harbor from the wild swings of the wider crypto market, after one called TerraUSD — also known by its ticker, UST — imploded last week.
Backers of other popular stablecoins say their products stand on sounder foundations because they keep enough cash or other highly liquid reserves to meet any demand for redemptions.
For now, regulators aren’t drawing such fine distinctions.
“A lot to be done here, and in the meantime, the investing public is not that well-protected,” Securities and Exchange Commission Chair Gary Gensler said Monday in an appearance at the Financial Industry Regulatory Authority’s (FINRA) annual conference. “We’re going to continue to be a cop on the beat.”
Treasury Secretary Janet L. Yellen told lawmakers last week that UST’s fate underscored the need for them to authorize banklike requirements for stablecoin issuers, along the lines of what a Treasury-led panel of regulators recommended last fall. But a Treasury senior official said regulators won’t necessarily wait for lawmakers to act. “In the absence of congressional action,” this official said, speaking on the condition of anonymity to offer a candid assessment, last week’s volatility “will put regulators and stakeholders on a stronger footing if they feel the need to act alone to mitigate the risks.”
It still is not clear what sent UST into its tailspin. Crypto sleuths have some theories about how the stablecoin, which attempted to use complex financial engineering to keep its price at $1, slipped off its dollar peg and then kept sliding. It was trading around 10 cents on Monday, down from closer to 20 cents over the weekend, after a group established by UST creator Do Kwon revealed it had sold off $3 billion worth if bitcoin in an unsuccessful bid to prop up the stablecoin.
Kwon on Monday said he is not giving up, proposing a fresh start to try to revive the project. But the outcome was plain enough: The crypto equivalent of a bank run wiped out $42 billion in value from coins associated with the project, according to blockchain analytics firm Elliptic.
“Terra is throwing everything including the sink here, but the market is down on them,” said Ed Moya, a crypto analyst at the trading firm OANDA. Moya said the coin’s meltdown, and the broader crypto sell-off it helped provoke, appears to have soured investors on digital assets for now. “There’s been a lot of damage across both retail and institutional traders, and the crypto trade is not looking appealing just yet.”
A number of stablecoin regulation proposals are circulating in Congress, but none follow the approach suggested by the Treasury-led group. Crypto industry leaders are turning their attention to a more comprehensive bill for establishing a crypto regulatory framework that Sens. Cynthia M. Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.) are expected to introduce soon.
Lummis said the proposal could snuff out coins like UST, known as algorithmic stablecoins for the trading mechanism designed to keep their price at a dollar. “We continue to evaluate that issue and others after our bill draft passes because our draft contemplates consumer safety provisions that would render an algorithmic stablecoin less attractive, even to an issuer,” Lummis said. “We continue to evaluate that issue and others.”
Meanwhile, regulators are checking in with crypto experts as they plot their response, including industry leaders and advocates of stricter regulation. “I know firsthand that policymakers at the White House, Treasury and Fed are working hard to develop a policy framework for stablecoins,” said Dan Awrey, a Cornell Law School professor who focuses on financial regulation and advised the Treasury group last fall.
Awrey said policymakers face two challenges. “The first involves mapping, evaluating, and resolving the myriad of legal, technological, and institutional issues necessary to design an effective framework — one that balances the objectives of efficiency, competition, and stability,” he wrote in an email. “The second, far more daunting but important challenge, involves answering a broader — and as yet unanswered — set of questions about the role we want stablecoins to play, if any, in the money and payment systems of the future.”
Key regulators will have several opportunities to weigh in this week. Gensler is testifying before the House Appropriations Committee on Wednesday. The same day, Rostin Behnam, chair of the Commodity Futures Trading Commission, will talk to the FINRA conference about crypto regulation.
On Thursday, the Senate Banking Committee will hold a confirmation hearing for Michael Barr to serve as the top financial regulator at the Federal Reserve — and two new SEC commissioners, Democrat Jaime Lizárraga and Republican Mark Toshiro Uyeda.
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