It has been a rough few weeks for the market.
Half a trillion dollars was wiped off the sector's market cap as terraUSD, one of the most popular U.S. dollar-pegged stable coins, collapsed.
ether continues to take a beating on the price charts as the sell-off keeps hammering the industry.
The events of the last month have been compared to the fall of a major Wall Street bank in 2008 by some investors.
The acting Comptroller of the Currency for the U.S. Treasury Department said that it revealed some deeper vulnerabilities in the system.
I think that tethering to other stable coins was something that wasn't assumed. I think people have to pay attention to that.
Government officials don't seem to be concerned about a crash taking down the economy.
Several senators and regulators told CNBC on the sidelines of the DC Blockchain Summit that the spillover effects are contained, and that U.S. regulation is the key to success for cryptocurrencies.
There needs to be rules that make it more predictable, transparent, and that there are needed consumer protections.
We don't want to choke a new industry and innovation out so that we lose out on opportunities. We're missing the economic growth and job creation that's a part of it, because a lot of these opportunities just move offshore. If we get the regulation right, it can be helpful to the industry and protect consumers.
terraUSD, or UST, plummeted in value in early May as investors rushed to pull out their money. At their peak, luna and UST had a market value of over $60 billion. They are essentially worthless now.
Stablecoins are a type of coin that is tied to the price of a real-world asset. UST is a breed of stable coin. UST relied on computer code to self-stabilize its value, unlike USDC, which has assets in reserve as a way to back their token.
UST was linked to a sister token called luna through computer code on the block chain, which helped to keep prices close to $1. Developers used the underlying system of the coins to create other applications, such as NFTs and finance apps.
When the price of luna became unstable, investors withdrew their money.
UST's failure, though infectious, wasn't much of a surprise to some.
Nic Carter tells CNBC that the fundamental problem with UST was that it was largely backed by faith in the issuer.
Cynthia Lummis, who is one of the most progressive lawmakers on Capitol Hill, agrees with Carter.
There are two types of stable coins. Lummis told CNBC that the one that failed is an algorithmic stable coin. She wanted consumers to know that not all stable coins are equal and that choosing an asset-backed stable coin is important.
The managing director of the International Monetary Fund echoed that sentiment at the annual meeting of the World Economic Forum.
Kristalina Georgieva, the head of the International Monetary Fund, begged them not to pull out of the importance of this world.
The responsibility for putting up protective guardrails for investors lies with regulators, as Georgieva stressed that stable coins not backed by assets are a pyramid scheme.
Hester Peirce of the Securities and Exchange Commission said that it was likely that regulation would happen faster because of the events of recent weeks.
The SEC Commissioner said that the ability of people to experiment with different models needs to be protected.
The UST debacle shows how much action regulators need to take to protect against a possible return of shadow banking, which is a type of banking system in which financial activities are not regulated.
There are a lot of safeguards that could do the trick.
When a regulatory framework is already existing, it is always quicker to extend it.
The President's Working Group on Financial Markets published a report detailing a regulatory framework for stable coins months before the UST project failed. The stablecoin landscape is divided into two main camps: trading and payment stable coins.
Stable coins are used to facilitate trading of other digital assets. The report looks to set down best practices to regulate stable coins to be more widely used as a means of payment.
The report was co-authored by the Office of the Comptroller of the Currency.
This is a familiar story and the way to deal with it is prudential regulation. The proposals for more of a bank kind of regulatory-type approach is a good starting point.
The question that regulators and lawmakers need to address is whether stable coins are actually derivatives.
If people started to think about some of these really novel crypto tokens as frankly, lottery tickets. When you go and you buy a lottery ticket, you might strike it big, and get rich quick, but you might not.
A derivative is a financial instrument that allows people to trade on the price fluctuations of an underlying asset. According to the way the SEC is currently thinking, the underlying asset can be anything, including commodities such as gold.
The SEC regulates securities, but for everything that isn't a security, the CFTC probably has something to do with it.
We regulate derivatives based on commodities, but we also regulate spot markets.
The last time we had a financial crisis like this, Congress came up with a solution. There were new restrictions on the trading practices of FDIC-insured institutions in the act.
If some of these trading stable coins are derivatives, then the dealer has to manage the risk associated with that.
SEC Commissioner Peirce says that Congress makes the decisions on how to move forward. Congress needs to divvy up enforcement responsibilities because Wall Street's top regulator is already acting.
The division of regulatory labor is spelled out in a proposed bill by Lummis and Gillibrand.
Lummis told CNBC that it was setting it on top of the current regulatory framework for assets. We are looking at consumer protection and privacy.
Stable coin regulation is also included in the bill. According to Lummis, the bill contemplates the existence of this specific subset of digital assets and requires that they either be FDIC-insured or more than 100% backed by hard assets.
There is a group in the Senate with good people on both sides of the aisle coming together to get it right, according to Booker.
The SEC is not the right place to regulate this industry. The majority of the cryptocurrencies are commodity-like.
Until Capitol Hill pushes a bill into law, investors need to exercise a lot more caution.
When you buy a lottery ticket, you might strike it big, and get rich quick, but you might not.
I'm worried that people are buying some of these coins because they think they're guaranteed to make a lot of money.
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