Crypto Regulation Weekly: TerraUSD’s Collapse Raises Alarms Worldwide

The 800-pound gorilla in any conversation about crypto regulation this week was the $45 billion de-pegging and collapse of the TerraUSD stablecoin.

The G-7 is preparing to call on the international Financial Stability Board (FSB) to push harder for the creation and passage of a comprehensive and internationally-unified set of cryptocurrency regulations, Reuters reported Thursday (May 19).

Of course, the FSB has been screaming this very message at the top of its lungs for quite some time — most recently in mid-February, when it issued a formal call for governments around the world to move faster on the regulation of crypto generally and stablecoins in particular.

See also: FSB Sounds the Alarm of Crypto Assets’ Growing Threats

“Crypto-asset markets are fast evolving and could reach a point where they represent a threat to global financial stability due to their scale, structural vulnerabilities and increasing interconnectedness with the traditional financial system,” the FSB said. “Reported outstanding stablecoin assets are equivalent to almost 20% of the total size of U.S. assets held in institutional and retail prime money market funds … [while] concerns about regulatory compliance, quality and sufficiency of reserve assets, and standards of risk management and governance,” remain unaddressed.

Read more: FSB Tells National Regulators to Move Faster on Stablecoin Regulation

Still, the call by the Group of Seven’s finance ministers and central bankers, made “in light of the recent turmoil in the crypto-asset market,” may make regulators and legislators listen.

Europe is ahead of the U.S., with its Markets in Crypto Assets (MiCA) regulatory framework heading towards a vote. The U.S. only began its efforts with President Joe Biden’s March Executive Order calling on U.S. agencies to come up with a proposal by September.

That’s in progress but only just, as suggested by the Commerce Department’s May 19 call for public comments on the Executive Order — which will remain open until July 5.

Meanwhile, South Korean regulators have begun “emergency” inspections of local crypto exchanges, the Yonhap News Agency reported on Tuesday (May 17).

“Last week, financial authorities asked for data on the amount of transactions and investors, and sized up the exchanges’ relevant measures,” a local cryptocurrency exchange executive said, according to Yonhap. “I think they did it to draw up measures to minimize the damage to investors in the future.”

Getting Ready to Rumble

Noting in congressional testimony that TerraUSD and its sister coin LUNA went “from $50 billion to near-zero” in the past few weeks, Securities and Exchange Commission (SEC) Chairman Gary Gensler on Wednesday (May 18) repeated his warning to unregistered crypto exchanges to come in from the cold, threatening continued enforcement actions.

The SEC recently won its first victory on this field, when Coinbase revealed its registration in its Q1 2022 earnings announcement on May 10.

Citing the desire to “have better access to capital markets quickly and efficiently when needed,” the company said it would also “be able to offer and sell securities in the future” — adding that it had no such plans at present.

Related: Coinbase Registers With the SEC To Prevent Regulatory Setbacks

Gensler also said he needed a bigger budget to devote even more resources to crypto.

Also on May 18, The Wall Street Journal reported that Commodity Futures Trading Commission Chairman Rostin Behnam said that increased enforcement is coming from his agency as the number of alleged cases of crypto market fraud and manipulation accelerates.

See also: At Senate Hearing, CFTC Chair Behnam Steps Up Battle With SEC for Crypto Oversight

“Headlines about the loss of tens of millions of dollars in digital assets due to protocol exploits, phishing attacks, preying on vulnerable people and other fraudulent and manipulative schemes have become far too common,” he said. “I’ve said many times, the crypto markets present unique characteristics that would benefit from the federal market oversight.”

Then there’s the Treasury Department’s Financial Crimes Enforcement Network (FinCEN), whose associate director for enforcement, Alessio Evangelista, warned the industry to be more aggressive in blacklisting “problematic” digital wallets, CoinDesk reported.

Exchanges often ignore these wallets “right up until the day of an OFAC designation or criminal indictment,” he said, warning that they often ignore “clearly observable red flags that they could and arguably should have taken note of long ago.”

G’day, Crypto

In Australia, tax authorities issued a public warning that the sale of cryptocurrencies — and even non-fungible tokens (NFTs) — can attract capital gains taxes.

“Remember, you can’t offset your crypto losses against your salary and wages,” Australian Tax Office (ATO) Assistant Commissioner Tim Loh reminded taxpayers.

Meanwhile, The Guardian reported that the nation’s largest financial institution, Commonwealth Bank of Australia, announced a pause in the roll-out of a planned cryptocurrency trading function in its banking app.

“As events of the last week have reinforced, it is clearly a very volatile sector that remains an enormous amount of interest,” CEO Matt Comyn said. “But alongside that volatility and awareness and I guess the scale, certainly globally, you can see there is a lot of interest from regulators and people thinking about the best way to regulate that.”

A time frame to resume the roll-out has not been announced.

Hesitation and Enthusiasm

In Panama, President Laurentino Cortizo said on Tuesday that he was considering a veto of a bill passed by the National Assembly that would allow Panamanians to use cryptocurrencies for payments, CoinDesk reported.

While calling the bill a good law, he said it was not good enough given the country’s desire to get off the Financial Action Task Force’s (FATF) “grey list” of countries with weak or insufficient anti-money laundering (AML) and countering the financing of terror (CFT) regulations.

“I have to be very careful if the law has clauses related to money laundering activities or anti-money laundering activities,” Cortizo said. “That is very important for us.”

Meanwhile, El Salvador’s bitcoin-as-legal-tender experiment isn’t going very well — its $1 billion bitcoin bond issue is on ice, the use of bitcoin for payments remains very low, and his investment in BTC has lost tens of millions of dollars — but that hasn’t stopped President Nayib Bukele from trying to export it. At a meeting of the Alliance for Financial Inclusion (AFI) this week, he recommended that the 44 developing nations in attendance consider following suit.

Just Say No

In Europe, the head of Capital Markets and Transparency Supervision at the Dutch Authority for Financial Markets (AFM) said that retail investors should be banned from trading in crypto derivatives, citing an opaque and manipulation-prone market, CoinDesk reported.

The report also noted that the top AML official at Germany’s financial regulator BaFin called for new decentralized finance (DeFi) regulations, saying “experience shows that DeFi is not quite as grassroots and selfless as fans of the space depict” and that it cannot thrive without targeted regulations.

In India, the crypto-bashing Reserve Bank of India (RBI) said in a report that crypto may lead to “dollarization” of the economy.

“Almost all cryptocurrencies are dollar-denominated and issued by foreign private entities, it may eventually lead to dollarization of a part of our economy which will be against the country’s sovereign interest,” India’s Economic Times reported. Cryptocurrencies “can replace a part of monetary system [and] will also undermine the RBI’s capacity to regulate the flow of money in the system.”

Read more: India Boots Coinbase From Payments Interface Days After It Enters Market

India’s Prime Minister, Narendra Modi, has made it very clear that he wants to protect the rupee, and has said that using crypto for payments will not be permitted.