Saturday, September 23, 2023

Crypto Crisis Prompts Regulation


Bills and the human toll create a perfect storm. Cryptos thrived as old-system alternatives. The recent crypto crash has seen markets plunge, investors sell assets, and a bank run, reigniting calls for regulation. 

Crypto crackdown is coming. The business has long derided traditional banks, stock markets, and investing. 

After Terra plummeted, Treasury Secretary Janet Yellen pressed Congress to regulate stablecoins. The SEC investigates. Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) introduced digital currency legislation this month. EU developing crypto law. 

Analysts predict a $2 trillion-losing business will need more oversight. Terra’s demise might cost $60 billion. 

Bill Maurer, director of UC Irvine’s Institute for Money, Technology and Financial Inclusion, said the uncertain economy and marketing of crypto to disadvantaged and minority communities will lead to additional regulation.

Bitcoin and Ethereum prices have fallen. Celsius Network halted transfers and withdrawals because of liquidity concerns and severe market conditions. Coinbase laid off 1,100 employees, or 18%, last week. 

Crypto Shadow Banking Ends

In contrast to an insured and adequately regulated financial institution, many people’s present concerns about cryptos revolve around the idea that the market is a hotbed of shadow banking.

Companies that operate this way forgo federal deposit insurance, which protects investors and ensures market liquidity. 

These measures boost public trust in the financial system by ensuring the value of money and the availability of cash. Trust in the crypto system stems from the users’ enthusiasm rather than their confidence in its security measures.

One of the underlying fallacies of crypto is that you’ll have unregulated, safe private money and banking owing to a technological workaround, says UC Irvine law professor Mehrsa Baradaran. 

Celsius froze withdrawals in reaction to a typical bank run, and there was no government deposit insurance. Failure of the company may be ominous. 

The ecosystem is pressured by falling cryptocurrency prices. Babel halted withdrawals while reviewing its liquidity. Over $2 billion and $3 billion in loans. FTX gave competitor BlockFi a $250 million line of credit. Last week, FTX joined Voyager Digital. 

Baradaran compared it to 1907 when J.P. Morgan decided winners and losers. 

Baradaran said that FTX bailed them out because they’re rich, like J.P. Morgan. As in 1907, businesses can’t be bailed out during the Great Depression. 

Sign of the Times

The Gillibrand-Lummis plan would make cryptos commodities, not securities. In May, the SEC added 20 positions to its Crypto Assets and Cyber Unit to monitor and investigate the crypto sector. The agency’s director wants crypto regulation. 

It’s uncertain if and how much the Senate plan will change. 

Baradaran is doubtful that Congress will enact legislation soon due to the impasse. This doesn’t rule out action by the SEC, CFTC, or other government agencies, but it raises questions about a unified framework in the U.S. 

Regulation is disastrous, said Baradaran. Who cares? The regulated industry will reject a regulatory system. Harder-to-pass items go to the Fed, Treasury, FDIC, or OCC. These agencies have power. 

Lars Seier Christensen, head of the Switzerland-based Concordium Foundation, is worried about decentralised finance occurrences. DeFi transactions are blockchain-based. 

Christensen also founded the Danish internet trading and investment bank Saxo Bank. Involuntary liquidation of crypto assets put as collateral might affect values even without systemic issues. 

Some crypto businesses are worried. 

Hokk Finance director Mark Basa warns that regulation is coming. Regulators want to ensure [crypto backers] aren’t advertising the asset as speculative.


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