Blog: Deepening Crypto Winter to Prompt Regulatory Drive –

Containing the impact of the crypto meltdown has become an urgent imperative, as the near-total collapse of Terra-Luna and Celsius Network’s difficulties show.

Terra-Luna’s ecosystem has imploded, while crypto-lender Celsius Network battles insolvency. This is not the first time that cryptocurrencies have crashed and the massive volatility should be nothing new for many market players.

But other weak spots are turning up with the market decline. Hong Kong-based Babel Finance announced last Friday it was temporarily suspending redemptions and withdrawals due to the «unusual liquidity pressures» it was facing. Since then, as reported, it has reached a debt agreement with some counterparties. 

Three Arrows Capital, founded by a former Credit Suisse trader, is looking at the possibility of asset sales – or a bailout.

Better Investor Protection

Regulators on both sides of the Atlantic are now focusing on the sector given the current crash, with both proponents and skeptics asking themselves if anything could have been done to prevent the collapse.

Many central bankers and supervisors now believe that much stronger regulation is the key to protecting investors and smoothing over the volatility of digital assets in the long term.

They are increasingly asking for a combined effort between crypto intermediaries and traditional finance to look at the risks comprehensively in the context of overall financial stability while ensuring consumer and investor protection. For many, they should submit to the same regulation and supervision that other asset classes have.

Europe Takes a Step Forward

In Europe, the crypto winter looks set to thaw and boil over into a summer heatwave, as it appears to be clearly outpacing the US. The EU intends to keep pushing forward its draft legislation «Markets in Crypto Assets Regulation» (Mica in short).

As part of that, it has proposed a pilot regime for market infrastructure that aims at trading and settling transactions in financial instruments deemed crypto-assets in a way that doesn’t hamper innovation.

A specific new framework was also drafted for utility and payment tokens not qualifying as financial instruments, which would replace all other EU and national rules around the issuance, trading, and storage, given they have been widely divergent until now. 

France Steams Ahead

France, which currently holds the presidency of the EU Council, is trying to get an agreement by 30 June, when its term ends. On that very day, it will hold a so-called trialogue between the members of parliament, the EU Council, and the European Commission.

Mica has been a bone of contention for a long time and it has become highly politicized. No one yet knows how heated the discussion will be at the end of June but it is reasonable to expect there will only be an agreement in autumn.

US Report in September

At the start of September, the 180 day deadline for the Executive Order from the White House on digital assets is up. It is likely to be the first in a long line of reports that demand wide-reaching changes in policy, many of which are likely to end up being drafted as future regulation.

A bipartisan congressional committee recently came up with new rules for crypto-currencies, requiring that the burden of supervision be put under the onus of the Commodity Futures Trading Commission (CFTC), which is seen as being friendlier than the US Securities and Exchange Commission (SEC).

Stablecoins in Focus

The draft contains proposals on how to tax crypto-assets and tightens requirements for stablecoin issuers. They should be required to hold highly liquid assets corresponding to the value of the outstanding stablecoins they have issued, with the exact level publicly disclosed.

US financial circles have criticized the draft, saying that it would create unsafe, unstable, and uninsured stablecoin banks. It ignores 50 years of financial regulation and could be the seed that engenders the next banking crisis, some say. Most insiders don’t even think it will pass Congress in its current state.

Fed Warning

On Friday, the Fed jumped in the fray. It characterized stablecoins as a potential risk to financial stability and right at the heart of a very volatile crypto market. In its monetary policy report, the Fed stated:

«Recent strains experienced in markets for stablecoins — digital assets that aim to maintain a stable value relative to a national currency or other reference assets — and other digital assets have highlighted the structural fragilities in that rapidly growing sector,» the Fed wrote, almost as if it was talking in terms of the Terra Luna ecosystem.

«More generally, stablecoins that are not backed by safe and sufficiently liquid assets and are not subject to appropriate regulatory standards create risks to investors and potentially to the financial system, including susceptibility to potentially destabilizing runs,» it warned…These vulnerabilities may be exacerbated by a lack of transparency regarding the riskiness and liquidity of assets backing stablecoins» 

It then referred to the US President’s Working Group on Financial Markets, which is working to address the prudential risks by posed by stablecoins.

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