WASHINGTON – Cryptocurrency investors have lost hundreds of billions of dollars in the last week amid a selloff of digital assets and other riskier investments.
The crash is an I-told-you-so moment for crypto critics who’ve said the industry needs stricter regulation in order to protect consumers. Some apparent investors posted despairing messages on Reddit about losing their life savings.
“We have an unregulated system in which people speculated a lot on things that they didn’t really understand,” said Todd Phillips, an expert on financial regulation at the liberal Center for American Progress. “And we are seeing a giant market correction that is hurting a lot of people.”
Sen. Elizabeth Warren (D-Mass.) called the 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.”
Even crypto boosters acknowledged the need for closer supervision of the industry. Jake Chervinsky, head of policy for the Blockchain Association, the industry’s lead lobbying group in Washington, acknowledged on Twitter that last week was “among the most painful weeks in crypto history” and endorsed calls for Congress to step in.
But what reform looks like is an open question, as many lawmakers remain unfamiliar with crypto and its associated jargon ― and many of the members who do know the lingo sound like they want to coddle the industry.
Cryptocurrencies are not really currencies, though their proponents insist they could be widely used in commerce someday. For now, they’re just digital assets used mainly for speculative investing that are based on blockchain technology. Instead of going through an intermediary such as a bank, blockchain technology works by linking a peer network of computers.
This month’s selloff — which saw the industry’s overall value plummet from $1.8 trillion to $1.1 trillion last week — was all the more notable because it involved the failure of a so-called stablecoin. Stablecoins are supposed to be less volatile, holding a one-to-one ratio to the value of a dollar. But a stablecoin called Terra totally collapsed, and another called Tether briefly lost its peg as well, as panicky investors sold off their holdings amid an apparent crisis of confidence in the tokens being able to hold their value.
The Biden administration has said that only insured depository institutions like banks should be able to issue stablecoins, rather than random tech companies. Terra was created by a South Korean company called Terraform labs.
“They present the same kind of risks that we have known for centuries in connection with bank runs,” Treasury Secretary Janet Yellen told House lawmakers during a hearing on Thursday. “They’re assets that purport to guarantee conversion at will to the dollar on a 1 for 1 basis.”
Banks are required to hold assets in reserve in case of unexpected demand from depositors, and the federal government insures deposits up to a certain amount. Terra saw exactly the kind of run that federal banking rules are designed to prevent.
Chervinsky said he supported more permissive proposals by Rep. Josh Gottheimer (D-N.J.) and Sen. Pat Toomey (R-Pa.) that would allow non-banks to issue stablecoins.
Toomey and other Republicans, such as Rep. Patrick McHenry (R-N.C.), stressed that not all stablecoins are the same. Terra was backed by an algorithm instead of actual reserve assets.
“It strikes me as quite possible that the design of Terra is fundamentally unstable,” Toomey told HuffPost.
Toomey and Gottheimer represent something of a bipartisan consensus among a handful of crypto enthusiasts on the Hill that new legislation should shield the industry rather than crack down on it. In addition to his stablecoin bill, Gottheimer has co-sponsored legislation that would exempt crypto tokens from securities laws.
The Securities and Exchange Commission has brought dozens of enforcement actions against digital asset issuers, prompting complaints of “regulation through enforcement” from industry players and their backers in Congress.
Meanwhile, Sens. Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.) are drafting a more comprehensive bill that would regulate stablecoins and other tokens as well. Crypto developers raising money through “initial coin offerings,” for instance, would have to register with the SEC just like any company selling stock to the public.
Lummis said the bill would drop sometime this month. She said that if the rules she and Gillibrand envision had been in place, this month’s crash would not have happened.
Lummis and Toomey are the only senators who own cryptocurrency assets, according to a review of disclosure forms by The Wall Street Journal. Lummis said that if she weren’t a senator, she would go out and buy more Bitcoin in the wake of last week’s nosedive.
“You can buy it at a discount right now,” she said.
Phillips has argued that existing banking and securities laws, which have been on the books since shortly after the great Wall Street crash of 1929, already cover most of what’s happening in the crypto industry.
Securities laws require firms to disclose basic details about their business to potential investors; some crypto projects don’t even disclose the names of the people behind them.
“Much of what’s out there is covered by these laws,” Phillips said. “It’s just that the laws weren’t being followed.”
Igor Bobic contributed reporting.