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An existential crisis is afflicting cryptocurrency. Lender to cryptocurrency investors Celsius filed into bankruptcy last month. Since June 12, users have not been able to withdraw their money, and it is unsure if or when they will. However, Celsius is merely the first domino to fall.
Recent bankruptcy filings by cryptocurrency lenders Voyager Digital and others indicate Most regular investors who put money in Voyager are uncertain as to whether or when they will see their money back. Meanwhile, the price of bitcoin has recently dropped significantly from its previous year-end peak, falling more than 70%.
Furthermore, the price of TerraUSD (UST), a fictitious stablecoin that was predicted to sell at $1, fell much below that mark in May. Anyone who owned it or its companion coin, Luna (whose value was connected to UST), would have suffered enormous losses as a result.
Risky lending, inadequate risk management, and hazy financial statements combine to cause the issue. As a result, several cryptocurrency businesses lacked the capital to absorb the shock when cryptocurrency prices plummeted. Probably as a result of worries about growing inflation and the risk of a recession. Millions of dollars’ worth of value have vanished as a result, frequently at the expense of regular investors.
As far as governments go, cryptocurrencies like Bitcoin are unregulated. But at this point, it is both necessary and inevitable that the government will begin to regulate the cryptocurrency market more strictly. While waiting for the government to take action, the industry cannot stand still. Additionally, cryptocurrency businesses need to improve internal control.
Transparency – The Fundamental Principle of Blockchain Technology
More transparency is where to start with that. Transparency is one of the fundamental principles of blockchain technology. All transactions on the Bitcoin blockchain, for instance, are visible to everyone. Notably, other cryptocurrency businesses are startlingly opaque.
The Celsius incident might have had a different outcome with more control. Its basic business concept involved taking user deposits and using them for uncertain and dangerous investments while rewarding customers with high interest rates. With no FDIC insurance or regulatory safeguards, Celsius was virtually operating as a bank.
However, there is little indication that this kind of regulatory reform will occur soon. Because of this, investors of all stripes, including venture capitalists, should pressure businesses to be more open and accountable, and demand audits and disclosures of their lending policies and capital reserves. Few looked closely at these companies’ business operations when cryptocurrency values were at all-time highs.
With the stablecoin UST, the same held true. When the market was growing, few individuals publicly brought up what are now obvious red flags, and those who did risked the risk of being screamed down by cryptocurrency supporters on social media. The sudden and spectacular collapse of UST may speed up the regulation of stablecoins in the US.
There has been crypto regulation attempts
Many people worry that some of the top stablecoins aren’t quite as stable as they claim to be. If investors were to convert their coins in large numbers for the US dollars that are intended to support them, the stablecoin issuer could not have enough cash on hand to fulfil these orders. Despite rumours that US senators were nearing a bipartisan deal to regulate stablecoins, the bill’s consideration has been delayed until beyond August. Stablecoin issuers would be subject to federal supervision under the law, which is still under wraps. It would regulate them more like banks. The assets that support a stablecoin would likewise be subject to tight rules.
Another bill, filed by Senators Cynthia Lummis and Kirsten Gillibrand, proposes to promote regulatory clarity. By establishing a standard for distinguishing which digital assets are commodities and which are securities. That would make it clearer which assets fall under the purview of the Securities and Exchange Commission versus the Commodity Futures Trading Commission’s regulatory authority.
Greater protection for regular investors might result from a regulatory structure that is clearer and more uniform in terms of what businesses can and cannot do. As well as which federal agency is in charge of overseeing particular digital assets.
The more common method of regulation is through enforcement, where businesses have to pay a penalty after the fact. These sporadic enforcement efforts have a number of drawbacks, including the fact that they may not necessarily apply to the entire cryptographic industry.
These ideas are all constructive starts toward launching a real discussion regarding cryptocurrency regulation. However, it’s unclear when such restrictions would go into force. Or what they would look like in their finished form, given other priorities in Washington.
However, even prudent regulation won’t be sufficient. Attempts by any government to stifle innovation in the cryptographic space fail miserably. Political discussions could also cause a delay in legislation. In addition, cryptocurrency’s credibility diminishes with each new catastrophe. This might prompt authorities to act more strictly than they otherwise would, which would stifle new ideas in a sector that is still developing. An industry that prides itself on decentralization shouldn’t go to the government to save it from itself.