It’s time to have better crypto regulations, international financial ministers and watchdogs call.

It has been a rocky road for the digital asset world in the past few weeks. Bitcoin is on its course to recording two straight months of losses. The largest ‘algorithmic stablecoin’ Terra Luna is experiencing an epic meltdown. From peaking at $119, Terra’s Luna coin is now worth $0 – it virtually has no worth for the time being. Its stablecoin sister, UST, pegged at the US dollar is, as of writing, also worth $0. It’s a plunge so historic, it could determine the future of the stablecoin subsector; or in an extreme scenario, completely wear out investor confidence in stablecoins (and cryptocurrency as a whole, to an extent).

It’s crash after crash in the crypto world. Crypto market leaders are saying they are ‘poor again’ amidst the crisis. Tether has paid about $10 billion to withdrawals since early May. However, it has assured the public that the stablecoin (1 is to $1) has enough reserves to accommodate massive redemptions. The largest stablecoin has dropped to a record low of $0.94 per coin. Small-time investors are bruised over losing their investments – some, even life savings.

Time for tough regulations?

Stablecoin in spotlight: Following steep crypto decline, G7 calls for tougher  crypto regulations

In the third week of May, after drastic plunges in cryptocurrency – stablecoin, particularly – prices, G7 leaders expressed their concerns over the matter. 

In its latest communique, the G7 said it throws its full support behind the Financial Stability Board in addressing risks in the crypto-asset world. Part of the statement reads:

In light of the recent turmoil in the crypto-asset market, the G7 urges the FSB, in close coordination with international standard-setters, to advance the swift development and implementation of consistent and comprehensive regulation of crypto-asset issuers and service providers.

Following the sharp decline in stablecoins – particularly the USD Terra (UST) – the G7 stated crypto-assets should follow the same standards as the rest of the financial system. The world leaders ask the Financial Action Task Force to implement ‘stronger disclosure and regulatory reporting’ on stablecoin reserves. The statement continues:

We reaffirm that no global stablecoin project should begin operation until it adequately addresses relevant legal, regulatory and oversight requirements through appropriate design and by adhering to appliable standards. The G7 remains committed to high regulatory standards for global stabelcoins, following the principle of same activity, same risk, same regulation.

To contextualise, UST is the leading ‘algorithmic stablecoin’ globally. This means that 1 to $1 UST is not backed by fiat or physical reserves the way traditional stablecoins are so that they preserve their dollar peg. Instead, UST relies on its sister base coin Luna (1 Luna coin is burnt when a UST is minted and vice-versa) to balance the coin supply-demand and soak up volatility. Both UST and Luna plummeted (worst hit in the recent crypto crash). The Terra Luna crash wiped out about $45 billion worth of investments overnight.

Existing crypto regulations

Cryptocurrency is a decentralised financial system. It is inherently designed to be detached from any central institution – like banks or governments – so it cannot be controlled by a single entity, but by the crypto actors within the blockchain. Still, the trillion-dollar market is carefully being watched by world leaders and financial regulators, especially sceptical ones. Given the risks – price volatility, ransomware attacks and lack of regulations, mainly – concerns are unsurprising.

Currently, there are existing regulations surrounding cryptocurrency – security measures, anti-money laundering protocols and tax issues. The European Union, for example, highlights crypto regulations through the MiCA or Markets in Crypto-assets proposal, which is a part of the Commission’s Digital Finance package seeking to regulate the digital financial landscape.

With regards to stablecoins, part of the MiCA proposal reads:

While the crypto-asset market remains modest in size and does not currently pose a threat to financial stability, this may change with the advent of ‘global stablecoins’, which seek wider adoption by incorporating features aimed at stabilising their value and by exploiting the network effects stemming from the firms promoting these assets.

Under the MiCA proposal, the Commission calls for the entire crypto market to align its regulations with that of recognised financial regulators: FSB and FATF. Moreover, EU-based crypto issuers would also be subject to EU laws. MiCA also ensures the ‘limiting’ of stablecoin use and investment in the bloc. Read more on MiCA here.

EU’s DAC-8 also minimises the potential risks of the barely-regulated digital financial world. Principally, DAC-8 is concerned about the possibility of tax fraud, tax evasion and tax competition between EU jurisdictions as there is a lack of regulations to oversee the crypto market’s taxation system. We previously discussed DAC-8 in this article.

On the other hand, the US has come up with regulations related to taxing cryptocurrencies in the country. We discussed crypto tax in the US in this article.

Over in Asia, Singapore is at the forefront of working on stricter rules on how cryptocurrency works in the financial hub. The Monetary Authority of Singapore (MAS) acknowledged the healthy economic activity that cryptocurrency brings, as long as it’s checked. Its two-point approach: one, grow digital asset capabilities; two, manage the risks. The MAS regulates services related to digital assets in terms of activity, whilst allowing innovation. Generally, MAS’ regulations are focused on anti-money laundering and technology risks.

MAS managing director Ravi Menon said in 2017, ‘On the international front, the community could do more to itemise the various risks, rather than to speak of them as a basket of risks. Money laundering risks would require a specific kind of regulation. Technology and cyber-related risks are also important in this space and thirdly, investor protection.’

As cryptocurrency is a relatively new digital financial system with a massive potential to change the way the global economy works – new regulations might be needed: to manage the risks, protect investor interest and make sure the blockchain works for the public economy.

For now, it’s foggy; but when there is a more harmonious set of international policies and standards with which the crypto market should align, perhaps there will be a clearer direction to where this ever-volatile market can go. Whether up or down — that remains to be a question.

Bolder regulations mean bolder requirements

As the finance ministers and world leaders have started laying down plans to regulate the crypto market on both national and international levels, stricter compliance requirements are not too far behind: KYC and AML, specifically.

Bolder Group, an international fund administrator with locations in Europe, the Americas and Asia, has been servicing clients in the traditional and digital financial systems for decades. Our team of compliance officers and governance solutions experts can help you navigate the crypto world better, by easing the burden of compliance so you can focus on growing your investments and diversifying your portfolio.

Our crypto experts are also well-equipped and refreshed on the latest in the digital asset world. Bolder Group also offers crypto fund administration services.

To know more about what we can do, reach out to us today.

At one point, the Terra Luna blockchain was valued at $40 billion. Then, it came crashing down. Now, each Luna coin is worth $0. Let’s talk about how this happened and what’s next for the whole crypto world after the epic Terra Luna crash?

Image shows terra luna crash april 20-may 20, 2022
Luna price April 20, 2022 – May 20, 2022 (Screenshot from CoinDesk)

Look back  

In 2018, South Korean Do Kwon, 30, founded Terraform Labs, shortly after earlier digital currency project Basis failed. In effect, Kwon’s Terraform Labs created two sister digital currencies – the TerraUSD (UST) and Luna. Each serves different purposes. UST was always meant to be a stablecoin, so its value remains consistently at just $1. Unlike traditional stablecoins, however, UST is much more ‘algorithmic’. Meaning, it is not backed by any physical asset or holdings in banks to protect its value.   

Enter Luna – UST’s sister-slash-partner currency – which is meant to balance the two and keep UST’s dollar peg. While UST’s value is consistently just – more or less – a dollar, Luna, like other cryptocurrencies, rises and falls.   

How do the two balance each other, and how does UST keep its dollar peg minus the physical reserves? Well, Terra’s system goes like this: minting a UST is equivalent to burning a dollar-worth of Luna, and vice-versa. Theoretically, this relationship balances out the supply-demand of the coins, and therefore, stabilises the price. The ‘algorithmic’ dollar protects the coin value and investor assets.   

In essence, what shouldn’t happen to ensure the ‘balance’ and integrity of the algorithm and the Terra ecosystem is UST value dropping below a dollar and continuing to plummet — which is where it’s at now.   

So, how did Terra Luna crash exactly?

Leading to the Terra Luna crash

The UST enjoyed an all-time high of $1.09 for over a year since 2021 before it nosedived to $0.04 in May 2022. Its sister coin, Luna was valued at an all-time high of $119 and then historically plunged to $0. It spelt panic and investors were scrambling to liquidate.   

On May 16, the Terra blockchain halted its operations after an overnight 100% drop in the token’s price. How did this happen?   

For one, the broad crypto market has been bleeding recently. Bitcoin plunged in the first two weeks of May – so did the rest. And this pushed the value of Luna downward. As a result, UST, relying on Luna to absorb price volatility shocks, went below a dollar. The market hasn’t fully recovered yet; for the Terra ecosystem, things look bleak as does investor confidence.  

Another major reason for the crash – Anchor protocol, a borrowing/lending platform on the chain. The Terra network promised a 20% annual percentage yield to investors who bought UST and loaned it back to Anchor. Investors scrambled when they heard the news. At one point, 75 per cent of UST coins are parked in Anchor. So, one thing’s clear: investors are after the 20 per cent APY and Terra is using the protocol to attract capital. But when news of Luna losing value and UST depegging, investors ran for the exit, leaving the protocol dry.   

The promise of an algorithmic stablecoin with no fiat or collateral guarantees to hedge against the volatility of cryptocurrency and protect investors … well, it was broken. The architecture of the crypto subsector is, at the very beginning, already very risky. In 2021, Dr Ryan Clements of the University of Calgary Faculty of Law published his study ‘Built to Fail: The Inherent Fragility of Algorithmic Stablecoins’.   

According to Clements, such coins ‘are not stable at all but exist in a state of perpetual vulnerability’; he went as far as to say algorithmic stablecoins are ‘fundamentally flawed’. The Terra ecosystem is believed to be unsustainable from the very beginning because it heavily relies on market sentiment and demand volume, with no guarantee from collaterals or fiat reserves whatsoever.   

Call for regulations?  

Kwon, who is very visible and active on Twitter, has just recently announced he is ready to leave the project behind and move forward to another one: Terra 2.0 chain. #TerraisMoreThanUST, he tweets and has rallied the support of Terra builders to realise his proposal to create a hard fork back to the classic Luna. Following the Terra fiasco, however, investors aren’t excited about the rebuild.   

Terra investors are hurt; sceptical regulators are watching. In recent weeks, the crypto market was in a freefall, and investors are losing their money – life savings – due to the epic Terra Luna crash and how it took down with it the sector.  

Dr. Clements, in his study mentioned above, wrote there is a need for regulatory guidelines on stablecoins, such as transparency safeguards, risk disclosure and containment measures.  

In the wake of the Terra Luna catastrophe, authorities are taking an even closer look at the crypto space. French central bank head Francois Villeroy de Galhau told Reuters that crypto assets will be discussed during a G7 meeting this May.   

What happened in the recent past is a wake-up call for the urgent need for global regulation’, said Galhau.  

In March 2022, the European Union adopted the Markets in Crypt-assets (MiCA) Regulations. As an overview, MiCA was created to protect investors, ensure the crypto market integrity and prevent market manipulation as well as potential economic crimes like money laundering and terrorist financing.   

The Bolder Guarantee  

As a global cryptocurrency fund administrator, we watch and study the trends, patterns and latest developments in the cryptocurrency space. In doing so, we guarantee that our digital asset experts are well-informed so that they can provide our partners and clients with professional but personalised solutions.   

With the looming new cryptocurrency regulations, investors and crypto fund managers alike might have to comply with additional compliance requirements. With Bolder Group’s outsourced compliance and governance services, crypto investors and managers can focus on their portfolios and protecting their assets.  

Learn more about our crypto fund administration services here and our outsourced KYC compliance solutions here.  

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