The recent crypto winter has spooked regulators. The demise of Terraform labs provides a strong argument for government intervention in the future phase of the cryptocurrency industry. Regulators around the world are eager to establish tough cryptocurrency rules. According to a report by Bloomberg, the U.K.’s financial regulator and finance ministry, the Treasury, will investigate the collapse of Terra’s crypto tokens while developing new rules for cryptocurrency assets.
Regulators in the U.K. hasten crypto regulations with Terra’s demise in consideration
The United Kingdom’s regulators have accelerated crypto regulation. The recent market volatility in stablecoins will unquestionably have to get considered when the watchdogs collaborate with the Treasury to develop and implement new cryptocurrency regulations this fall, according to Sarah Pritchard, executive director for markets at the Financial Conduct Authority.
Pritchard’s remarks follow the failure of TerraUSD. The stablecoin kept its price peg using algorithms and swaps with its sister token LUNA rather than a reserve of dollar-equivalent assets. The two currencies had a combined market value of over $40 billion before the wipeout. Furthermore, Terra’s collapse caused damages in excess of $380 billion to the broader crypto market.
On May 13, Terra’s UST algorithmic stablecoin fell as low as 23 cents, and the LUNA token, designed to prevent the UST algorithmic stablecoin from being volatile, plummeted 96 percent at one point. Both coins are now worth less than a few dollars. The plunge has cost investors billions of dollars in investments.
Regulators recognize the importance of Stablecoins in the cryptocurrency environment. Traders also utilize them to keep a fixed value without having to convert cryptocurrencies back into fiat money. They’re also popular among investors as a secure haven for their portfolio during market volatility or simply as a digital payment option. Regulators are attempting to make them safe for digital buyers due to their significance to U.K. residents.
In March 2022, the U.K. regulators announced plans for a new crypto regulatory package intended to regulate stablecoins. The government has asked whether algorithmic stablecoins should get regulated in its inquiry.
The Treasury has said that it plans to modify existing electronic money and payment firm legislation to include stablecoin issuance, wallet provision, and custody services. According to U.K. regulators, if a company deals in stablecoin activities, it may need oversight from the Bank of England and FCA approval if many people utilize its services due to the systemic dangers they pose.
Regulators have, so far, primarily confined themselves to ensuring that crypto businesses comply with their AML requirements. Later this year, the U.K. watchdog will gain additional powers from the Treasury to regulate crypto-assets under the upcoming Financial Services and Markets Bill, which will provide further information.
Will the crypto industry survive incoming regulations?
Regulators are on high alert all over the world. According to the Bank for International Settlements (BIS) research, regulators must stop investigating bank entities, individuals, and crypto exchanges and start examining the whole decentralized network.
Regulators across the globe are pushing for a more streamlined and less volatile cryptocurrency world. However, first, they may have to abandon preconceptions about a single central authority controlling everything.
The demise of Terra has provided regulators and U.S. lawmakers an opportunity to advance stricter crypto regulations. According to U.S. SEC Commissioner Hester Peirce, cryptocurrency rules, including stablecoins, should be as transparent as possible, and this is something the U.S. Congress may assist with.
Crypto is an area where I’ve been calling for us to take steps to regulate the market, to put out clear rules about what people need to do […] but facts and circumstances matter, but it’s something that the Congress has been looking at. Congress may well weigh in, and I think that the events of last week are likely to encourage them to work more quickly on it.
Hester Peirce.
As the events following Terra occurred, more regulators and regulatory bodies began to pay attention to cryptocurrencies and stablecoins. In a congressional hearing last week, U.S. Treasury Secretary Janet Yellen cited the failure of Terra as an illustration of rapidly growing risks. However, she subsequently clarified that cryptocurrencies, overall, do not represent any significant systemic risk.
Regulators warn that the adoption of cryptocurrency carries several dangers, including the fracturing of the payments system and financial instability. The IMF has highlighted nations’ impending economic failures, such as El Salvador’s. In the last quarter of 2021, the Latin American country opted to accept Bitcoin as a formal payment option.
Regulators worry that countries with weaker macroeconomic frameworks may use cryptocurrencies to evade capital controls. Payment system fragmentation could also result as a consequence of crypto.
The collapse of Terra has prompted regulators to look at the cryptocurrency sector once again. Leaving investors with concerns about how the crypto industry will manage more government oversight. After last week’s severe losses, market analysts believe that regulations may be the greatest answer for investors. The conclusion is uncertain.
