The collapse of popular tokens and a drop in bitcoin values have stoked investor concern and increased pressure on Washington to act, The Hill reports.
Sharp sell-offs have occurred throughout financial markets, including the stock market, as interest rates have risen and recession chances have increased. Many crypto investors, as well as prominent participants in the expanding digital asset market, have seen their assets vanish.
One bitcoin’s value has dropped by 12% this week to around $29,700, its lowest level since July 2021 and less than half of its all-time high of $64,440 achieved in November. Another prominent cryptocurrency, Ethereum, is down 24 percent this week and over 50 percent for the year.
For years, Bitcoin, Ethereum, and other key tokens have fluctuated in value and are projected to rebound, although to a considerably lower ceiling. However, their recent severe falls have sent shockwaves across the larger cryptocurrency market, effectively shutting down the Terra network.
The Terra network supported two cryptocurrencies: Luna, a digital token similar to bitcoin that could be sold and swapped, and UST, a “stablecoin” that would always be worth $1. While other stable coin issuers rely on cash reserves or other secure investment assets to back up their tokens’ worth, UST was tied to the dollar using a Terra algorithm that created or burned Luna according to its performance.
Even if Luna dropped, one UST was supposed to always be equivalent to $1. However, when Luna’s value plummeted to around $100 per coin, Terra’s algorithm was unable to burn enough of the money to keep the value of UST afloat. The pressure rendered both useless, wiping out a network worth $2.7 billion at one point.
In November, the Treasury Department and a Biden administration working group suggested a considerably stricter regulatory environment for stablecoins, stating that they should only be issued by financial institutions that are guaranteed by government deposit insurance. This will restrict stablecoin supply to enterprises that abide by stringent bank restrictions designed to prevent future financial disasters.
Republican senators and several bitcoin industry advocacy organizations, on the other hand, have slammed the Biden administration idea, claiming it would wipe out large portions of the business.
On a conference call with reporters on Thursday, Sen. Pat Toomey (R-Pa.), the senior Republican on the Senate Banking Committee, noted that occurrences like the Terra collapse are a natural part of churning in a new market. He’s proposed legislation to establish a government stablecoin license for companies that agree to follow certain transparency regulations and protections.
Be the first to comment