NEW YORK (AP) — Drops in the cryptocurrency space are common, but the last one has really hit some nerves. Novice investors have taken to online forums to share stories of destroyed wealth and even suicidal despair. Veteran crypto supporters, including a prominent billionaire, were feeling humiliated.
When stablecoin TerraUSD exploded last month, an estimated $40 billion in investor funds was wiped out – and so far there has been little or no liability. Stablecoins are supposed to be less vulnerable to big swings – hence the name – but Terra suffered a spectacular crash in just a few days.
The Terra chapter has always publicized a long-known fact in the online crypto community: For every digital currency with lasting power, like Bitcoin, there have been hundreds of failed or worthless currencies in the short history of crypto. Thus Terra became the latest “sh-coin” – the term used by the community to describe coins that have become obscure.
Terra’s rapid collapse came as bitcoin, the most popular cryptocurrency, was in the midst of a crash that destroyed nearly half of its value in a matter of months. The events were a vivid reminder that professionals and investors of the mom and pop variety alike can roll the dice when it comes to putting money into digital assets.
After being mostly closed to crypto, it seems like Washington has had enough. On Tuesday, two senators, one Democrat and one Republican, proposed legislation that seeks to establish a regulatory framework around the cryptocurrency industry; Other members of Congress are considering more limited legislation.
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But what is surprising is that the cryptocurrency industry points to collaboration. Politicians, crypto enthusiasts and industry lobbyists point to the collapse of Terra and her icon Luna last month as the likely end of the libertarian experiment in crypto.
Stablecoins are typically pegged to a traditional financial instrument such as the US dollar and are assumed to be the cryptocurrency equivalent of investing in a conservative money market fund. But Terra was not backed by any fixed assets. Instead, founder Do Kwon promised that Terra’s proprietary algorithm would keep the coin’s value fixed at roughly $1.00. Those who criticized Terra would be attacked on social media by Kwon and his so-called “LUNAtics” army.
Kwon’s word turned out to be worthless. A massive sale event caused Terra to “crack the coin” and its value plummeted. Reddit boards dedicated to Terra and Luna were dominated for days by posts referencing the National Suicide Prevention Hotline.
Terra’s rise has not only attracted retail investors, but also more well-known cryptocurrency experts. One notable “Mad” was billionaire Mike Novogratz, who got a tattoo of the word Luna and a wolf howling at the moon on his upper arm. Novogratz told his followers that the tattoo will “constantly remind that venture investment requires humility.”
Michael Estrabillo has entrusted his crypto investments to stablegains, an investment vehicle that he says reassures him and other investors that the funds are being secured in one of the largest stablecoins, USD Coin. He then said that on May 9, he was informed that his money was locked in Terra.
“If I had known that I was involved in a currency powered by an algorithm, I would never have invested in it,” said Estrabillo.
Washington may also be recognizing the fact that what was once a niche part of the internet and finance has become mainstream and can no longer be ignored.
The total value of crypto assets peaked at $2.8 trillion last November; It’s currently under $1.3 trillion, according to CoinGecko. Surveys show that roughly 16% of adult Americans, or 40 million people, have invested in cryptocurrencies. Retirement account giant Fidelity Investments now offers crypto as part of its 401(k) plan. Senator Cory Booker of D-New Jersey has repeatedly pointed out that cryptocurrencies are especially popular among Black Americans, a community that has long distrusted Wall Street.
Also, crypto has permeated popular culture. Numerous Super Bowl commercials touted crypto. Sports fields are now named after crypto projects, and the Washington Nationals baseball team had a sponsorship deal before Terra collapsed. Celebrities routinely sell cryptocurrencies on social media, and YouTube personalities generate millions of views talking about the latest crypto idea.
It seems that Terra’s downfall was a bridge too far.
On Tuesday, Sen. Kirsten Gillibrand, D-New York and Sen. Cynthia Lummis, R-Wyoming, to begin regulating the industry, to rewrite bitcoin and tax code to the Commodity Futures Trading Commission to include crypto. It will also fully issue stablecoins for the first time.
This comes after the Biden administration’s financial markets working group published a 22-page report last November, urging Congress to pass legislation that would regulate stablecoins. One recommendation includes a requirement that stablecoin issuers become banks that will hold sufficient cash reserves.
Treasury Secretary Janet Yellen called for stablecoin regulation at a House committee meeting in May, saying “we really need a regulatory framework to hedge against risks.”
It also seems that the cryptocurrency industry, with its libertarian leanings and deep skepticism towards Washington, could be on board.
“I think this is a bit of a wake-up call. A lot of people were surprised by Terra’s failure,” said Perianne Boring, founder of the Digital Chamber of Commerce, one of the top lobbyists in the cryptocurrency industry.
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Other crypto lobby groups, such as the Association for Digital Asset Markets, have announced their support for the Lummis-Gillibrand bill.
One idea that Washington seems to converge around is that institutions issuing stablecoins, often used as a bridge between the traditional finance and crypto world, should be transparent about the assets that support them and be as liquid as any other key instrument. In the field of finance.
Senator Pat Toomey of R-Pennsylvania is passing a separate bill that requires stablecoin providers to have a license to operate, restrict the types of assets they hold to support these stablecoins, and also be subject to routine inspection to support stablecoins. they are sleeping.
Describing Terra as a “no-price,” Toomey said in an interview that Terra’s collapse made it all the more important for Washington to build some railings around stablecoins. Toomey is the top Republican on the Senate Banking Committee.
“It is always difficult to cross the target line in the Senate, but there is nothing politically polarizing about establishing a legal regime for stablecoins,” Toomey said.
Two major stablecoins remained after the collapse of Terra: USD Coin, issued by the Circle company, and Tether, created by the Hong Kong-based company Bitfinex. Both have fixed assets to maintain their value, but Bitfinex is less transparent about the assets it owns and is not audited. There are also smaller stablecoin issuers that could become the latest hot item in the crypto world overnight.
“Washington’s engagement is not only urgent, it’s urgent,” Circle founder and CEO Jeremy Allaire said in an interview.
Hussein reported from Washington. Michael Liedtke of San Francisco contributed.