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Jonah Crane is a partner at Klaros.

First, in early May, TerraUSD, an algorithmic stablecoin, fell sharply, clearing billions of dollars in just a few short days. Celsius then suspended the rescue of his clients, who are believed to be in debt. Strong movements by Celsius - and the forced abolition of high positions - are volatile crypto markets. Bitcoin has briefly touched $ 20,000 and dropped more than 70% since its peak of November 2021.

These tensions and tensions that have caused them will likely give regulators and policymakers a new sense of urgency to solve the problems that have plagued the crypto industry. But these problems and declining crypto prices may signal a good opportunity to create a clear path forward. They are experiencing a rapidly growing regulatory environment.

What the directors say

In August 2021, federal banking agencies launched crypto "sprints" and, in the fall of 2021, set their 2022 agenda. In November 2021, the Presidential Financial Markets Working Group (PWG) released a detailed report on the risks associated with stablecoins, including the risk of bankruptcy, and called on Congress to pass a new law banning the issuance of stablecoin to insurance banks. Then in March 2022, President Biden issued a management directive to digital assets. The report acknowledged the potential benefits of innovation in digital assets, but emphasized the disadvantages: The term “risk” occurs 47 times.

A wide range of provincial regulators and governments are responsible for following the installation of Terra, and they also track Celsius problems and the wide market collapse. After the fall of Terra, U.S. Treasury Secretary Janet Yellen called for a “comprehensive framework” that regulates stablecoins and called on Congress to take action. Next, the SEC reportedly investigated the marketing of TerraUSD by Terraform Labs.

Just days after Celsius suspended the rescue, Securities and Exchange Commission (SEC) chairman Gary Gensler warned that crypto platforms that promise high profits could be too good to be true. Meanwhile, state security regulators in Alabama, Kentucky, New Jersey, Texas and Washington have opened an investigation into Celsius' actions. Following Terra's failure, Gensler announced that the organization would add 20 investigators and plaintiffs to its dedicated unit in cryptocurrency and cybersecurity applications.

In addition, more than 40 states have certain types of crypto laws in place or waiting in their legislature. And California Government Gavin Newsom recently issued a high-level order on cryptocurrencies, mapping a comprehensive regulatory framework for digital assets.

The ghosts of past financial problems

This recent market crash reveals how much consumers can lose - $ 2 billion in the crypto asset market has been removed. And both Terra and Celsius provide blatant examples of weak financial engineering combined with aggressive promotions that have led regulators to see similarities with past financial problems.

The collapse of Terra stablecoin and the result of market volatility will leave regulators warning of risks associated with a guaranteed crypto sensor. Terra experienced the parallel run of the old bank as investors began to lose confidence that they would always be able to redeem their token for a dollar. That is exactly what the PWG (and many others, including Sam Bankman-Fried) have warned will happen.

In addition, Terra gained its rate (nearly $ 18 billion) because it could not be included in the yield agreement and earned interest of up to 20%. Acting Monetary Manager Michael Hsu recently compared crop farming to Ponzi schemes - and he is not alone. The Anchor Protocol promised UST depositors a 20% yield, with no real way to continue paying interest if the money stopped flowing. Celsius used his borrowed assets as collateral to borrow more and to make a series of risky bets - including investing in Anchor Protocol - in a bid to repay his promise to pay 8 depositors.

Finally, both Terra and Celsius have caused instability in all crypto markets - a shadow of important consequences that could happen if, for us, Tether falls. This type of financial risk is exactly what regulators are trying to prevent.

How to prepare

At this point, crypto companies should think that regulation is unavoidable. If the industry wants to help itself, it has to be on the table. But more than that, industry leaders must be willing to redefine the way large segments of these markets operate.

In stablecoins, industry leaders should clearly distinguish between different models and initiate a dialogue on ways in which certain models, as well as certain regulatory changes, can achieve regulatory policy objectives. During the Terra crash, the market clearly saw some stablecoins - that is, 100% dollar-backed coins - more stable than others. And yet Tether, which has broken money several times in recent weeks, remains a critical component of much of the crypto market activity.

For their part, regulators, too, should begin to realize that not all stablecoins are created equal. The regulators were careful to warn of the "active risks" found in stablecoins, but did little to distinguish between stable and "unstable" coins. The New York Treasury Department, which regulates two stablecoin issuers, has issued a public directive requiring stablecoin reserves to be kept in safe and liquid assets and subject to independent proof. This guide provides an excellent basis for building a truly stable framework.

Source: yahoo

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