Regulators and central bankers around the world have long had stablecoins in their sites as a potential threat to financial security, their control over economies and the use of their national fiat currencies for retail payments.
That attention is returning to center stage this week after the TerraUSD stablecoin lost its dollar peg, dropping as low 30 cents before rising back to a hopeful 67 cents — a steep road to a full comeback — and fluctuating wildly since then.
Worse, it is an algorithmic stablecoin, which means it maintains its peg through an arbitrage mechanism set up with a partner coin Terra, which goes by LUNA on exchanges. Terra’s price has collapsed as well, starting the month at $80. As of Wednesday afternoon (May 11), its $2.25 — a 92% drop.
Treasury Secretary Janet Yellen referred to it during a Senate Banking Committee hearing, saying it showed why regulation is needed.
It’ll certainly put wind behind a very well-timed May 6 interview by Sen. Pat Toomey of Pennsylvania to push his Stablecoin TRUST Act, which would give stablecoins a legal definition and require a federal license for issuers, among other things.
TerraUSD’s troubles will also put an unfriendly focus on algorithmic stablecoins, which have displayed far more fragility than traditional fiat — and financial instrument-backed stablecoins, where the concern is more about the quality and security of the backing assets.
SEC Wins One
That isn’t the only news on the crypto enforcement front.
Securities and Exchange Commission (SEC) Chairman Gary Gensler called for more oversight and control, accusing many exchanges of trading against their customers, Bloomberg reported.
Seeking Wall Street-style firewalls between divisions, Gensler said, per the report, “Crypto’s got a lot of those challenges — of platforms trading ahead of their customers. In fact, they’re trading against their customers often because they’re market-marking against their customers.”
The SEC’s newly beefed-up Crypto Assets and Cyber Unit’s enforcement staff may or may not have had anything to do with top crypto exchange Coinbase’s decision to register with the agency.
The agency forced the company to halt the planned rollout of a lending product late last year, saying it would violate securities laws if it didn’t do otherwise.
Read more: Coinbase Kills Lend Product Amid SEC Ire
It will not only help Coinbase buy, sell and trade crypto assets that regulators ultimately decide to consider securities — pretty much all of them, according to Gensler — but give it leeway to issue its own financial products.
The company also brought up its woes with India’s crypto-unfriendly government in downbeat annual earnings call Tuesday (May 10).
Referring to press reports saying India’s policy amounts to a “shadow ban” CEO Brian Armstrong said it will remain in the country despite being forced out of the National Payments Corporation of India’s popular, central bank-regulated Unified Payments Interface (UPI), a big differentiator, just two days after the April 7 launch.
EU’s MiCA Endgame
The stablecoin situation will also bring attention to European Union Commissioner for Financial Services Mairead McGuinness’ recent call for more and better international cooperation on creating a globally compatible crypto regulation framework.
Meanwhile the EU’s Markets in Crypto Assets (MiCA) regulation bill is in the late stages of negotiations — mostly about tweaks, rather than broad policy strokes — and its latest focus is on the non-fungible tokens (NFTs) that store and track various types of media like art and music, as well as documents.
One provision calls for a ban on exchanges from countries designated as noncompliant (read “shady”) because of potential trade law violations, according to CoinDesk.
The negotiators are reportedly requiring NFT issuers to centralize and register before they launch collections — which would significantly expand the reach of MiCA oversight of a rapidly growing field without much real debate.
Britain Gets Aggressive
In the United Kingdom, the government announced plans to step up crypto regulation and enforcement in the annual queen’s speech at the opening of Parliament (delivered by Prince Charles in her absence) detailing its legislative agenda for the coming year.
This includes “harnessing the opportunities of innovative technologies in financial services, including supporting the safe adoption of cryptocurrencies and resilient outsourcing to technology providers,” it said.
On the enforcement front, it would create “powers to more quickly and easily seize and recover crypto assets, which are the principal medium used for ransomware,” the draft release speech stated. “The creation of a civil forfeiture power will mitigate the risk posed by those who cannot be criminally prosecuted but use their funds to further criminality.”
Here and There
Argentina is cracking down on unregistered crypto mining companies and jacking up electricity costs on the rest, CoinDesk reported.
Closer to home, California Gov. Gavin Newsom issued an executive order May 4, telling the state to start work on a comprehensive regulatory framework for blockchain and cryptocurrency companies. The goal, he said, is “to make California the first state to establish comprehensive regulatory and business environment for crypto assets.”
New York, which has an extensive, and very tough regulatory regime led by its tough-to-get BitLicense, might take exception to that “first” part.