FINTECH | CRYTOCURRENCY
The crypto market was in a downward spiral with nearly six months of losses when rumors surfaced about a possible sell-off of Bitcoin (BTC) to prop up the TerraUSD (UST)
“Luna Foundation Guard (LFG) said it spent almost all of the Bitcoin in its reserve last week in a futile attempt to save UST.” — CNBC.
You can read the other threads (2–7) on Twitter.
The $40 billion crash of UST and LUNA may have been the catalyst that caused a domino effect on the entire cryptocurrency market with losses of more than $500 billion and an exodus of nearly a trillion USD from the market.
What Is UST & How Does It Work?
“UST is the decentralized and algorithmic stablecoin of the Terra blockchain. It is a scalable, yield-bearing coin that is value-pegged to the US Dollar. TerraUSD was created to deliver value to the Terra community and offer a scalable solution for DeFi amid severe scalability problems faced by other stablecoin leaders like Dai.” — Coin Market Cap.
As we now know, that did not work as planned.
Although the Securities & Exchange Commission (SEC) is investigating Terra’s actions and the collapse of UST, there is little hope of any investors receiving compensation.
Compare UST to Tether (USDT)
“Tether (USDT) was one of the first cryptocurrencies to peg its market value to a fiat currency. Tether, originally called “Realcoin,” valued each token at $1 to reduce the friction of moving real currency throughout the cryptocurrency ecosystem.” — Coin Desk.
These coins have been nicknamed “stablecoins,” though some have not lived up to that billing, such as UST.
Here is the USDT to USD all-time chart. As you can see, it does not vary far from the $1.00 mark.
Now, this is the UST to USD All-Time Chart.
The difference is obvious; the solution to maintain the 1:1 ratio is not as apparent.
Some say you must admire Do Kwan’s perseverance, but it’s doubtful you would hear that from any small LUNA investor; most of them, without the benefit of foreseeing the crash, lost most, if not all of their investment.
However, many big investment houses, particularly those who backed Do Kwan in the first place, saw massive profits.
“Pantera Capital, a hedge fund that invested in Mr. Kwon’s efforts, made a profit of about 100 times its initial investment, after selling roughly 80 percent of its holdings of Luna over the last year.” — The NY Times.
Pantera supposedly backed Do Kwan’s concept with about $1.7 million but took out the equivalent of about $170 million.
Could Government Intervention Have Prevented This Financial Disaster?
It’s very doubtful that government regulation would have affected the fall of UST and LUNA. However, if each government had a central bank digital currency (CBDC) as a possible go-between pegged to their fiat currency, it could be beneficial.
However, it could do away with the need for many stablecoins, altcoins, and tokens, which likely wouldn’t hurt, as there are nearly 19,000 crypto coins.
You must understand that even the International Monetary Fund (IMF) used UST or a national variation of the token to distribute loans and grants to eligible countries.
Many saw LUNA, UST’s working token, as viable and possibly an excellent investment, hence the $120 all-time high (ATH).
Two US Senators Offer a Bipartisan Bill to Regulate Cryptocurrency
June 7 — “A bipartisan pair of U.S. senators unveiled a bill on Tuesday that would establish new rules for cryptocurrency, and hand the bulk of their oversight to the Commodity Futures Trading Commission (CFTC).” — Reuters.
Senators Kirsten Gillibrand, a Democrat from NY and Cynthia Lummis, a Republican from Wyoming, introduced what is being called a crypto-friendly bill, the Responsible Financial Innovation Act.
“Digital assets that meet the definition of a commodity, such as bitcoin and ether, which comprise more than half of digital asset market capitalization, will be regulated by the CFTC.” — Crypto News.
Investors have to be impressed with Senator Lummis’s enthusiasm, as she stated:
“The United States is the global financial leader, and to ensure the next generation of Americans enjoys greater opportunity, it is critical to integrate digital assets into existing law and to harness the efficiency and transparency of this asset class while addressing risk.”
Was this move in response to the UST/LUNA disaster and millions of investor losses or a timing coincidence? Although it is unlikely regulation by the Securities & Exchange Commission (SEC) and CFTC could have prevented this collapse, many are demanding government action.
Could Regulation Remove the Threat of Scams?
Many ask, are those agencies (CFTC & the SEC) doing enough to protect investors from scams and rug pulls?
Some believe the government should not be involved in cryptocurrency since it was initially developed as a decentralized, peer-to-peer (P2P) method to get banks and their massive fees out of our pockets.
So far, the government and the Fed have been powerless in preventing cryptocurrencies from penetrating all aspects of society or, much worse, preventing crypto scams.
A “rug pull” is “…a new type of scam involving cryptocurrency. The name comes from the expression ‘pulling the rug out.’ This is how it works: a developer attracts investors to a new cryptocurrency project, then pulls out before the project is built. This leaves the investors with a worthless currency.” — Economic Times.
Some cryptocurrency exchanges and crypto groups are set up to scam investors out of their money.
In the early days of BTC, when you couldn’t buy coin fractions, groups were set up to “pool” investor money to buy BTC, and as the price rose, investors could supposedly withdraw their profits — that didn’t always happen.
Typically, only the founders and a few early investors actually made money from these groups, and many were flat-out “Ponzi schemes,” where early investors were rewarded with new investor money.
The founders and early investors would vehemently defend the group online and show “checks” or online withdrawals as proof of the group’s liquidity and validity, until one day, the group was gone.
One of those was BNLimited, or Bitrobo, a London “registered” group that was a high-yield investment program (HYIP). If you need to get something off your chest or just vent about it, feel free to leave comments. I sympathize.
Anyone who has been involved with crypto investing for more than five or ten years likely has at least one story about being scammed. I know I have.
Although there are hundreds of stories online about “crypto millionaires” and people quitting their day jobs due to crypto, there are perhaps millions of those whose savings fell victim to scams and even regulatory requirements.
Many deposit money on exchanges, only to discover they can’t meet the Know Your Customer (KYC) or Anti-Money Laundering (AML) identification and resident requirements to withdraw their money.
Crypto investing has led to a massive economic boom in recent years, and the emerging blockchain technology is beginning to reshape how we view our world and the global economy.
Cryptocurrency exchanges, most notably Binance International (with an average daily trading volume of around $76B), have opened worldwide, with hundreds of thousands of new people flocking to all types of cryptocurrency-related forums, chat rooms, and even websites that cater to the desires of the cryptocurrency community.
What Can You Do?
There’s perhaps no better advice than I wrote in “Not Your Keys, Not Your Crypto (NYKNYC).”
“Take your coins offline as soon as you purchase them. The Ledger Nano X was only $149 at the time of this publication. That’s a small price to pay for securing possibly hundreds of thousands of dollars in crypto.”
It’s wise to immediately move your crypto from exchanges as no exchange is “too big to fail,” or go bankrupt.
Likewise, online wallets might not be the answer either. Cointelegraph announced in an article, HODLers Beware! by writer Erhan Karahman that 40 known cryptocurrency browser-based wallet extensions like MetaMask, Coinbase, and some two-factor authentications (2FA) are infected with malware that is designed to steal your private keys and address information.
How Several Unfortunate Events Led to Severe Losses & the Talk of Government Regulation
Many governments, most notably China and Russia, worry about lost taxes and illegal activities due to the decentralization of cryptocurrency. However, the blockchain ledger, by nature, is a public record of activity.
Likewise, there are many countries that welcome or promote cryptocurrency, such as the Central African Republic and El Salvador that use Bitcoin as legal tender, and Turkey, Vietnam, and others that promote cryptocurrency use.
Every transaction can be traced by scouring the ledger. Although some argue that 10% of all mined BTC has been stolen, much has recently been recovered.
“About 94,000 Bitcoin have been recovered. Assistant Attorney General Kenneth Polite Jr said the seizure was proof the government ‘will not allow cryptocurrency to be a safe haven for money laundering or a zone of lawlessness within our financial system.’” — BBC News.
That’s just one instance; there are many more.
What’s more, if you look at Trustpilot, a Danish consumer review website, most of the major exchanges have a less than favorable rating:
- Coinbase TrustScore = 1.6
- Binance TrustScore = 3.0
- Crypto.com TrustScore = 2.1
- BlockFi TrustScore = 2.8
- FTX TrustScore = 1.9
Therefore, I believe that government regulators could do a lot of good for individual investors by regulating how exchanges collect KYC and AML data.
IMHO, it would be much better for investors if the CFTC made it mandatory for these exchanges to gather all required identification and tax documents before they accept a deposit or allow trades.
Regulation is unavoidable and it could make the crypto trading environment safer by regulating who can set up an exchange, monitor their transactions, and require them to provide support so that investors can make deposits and withdrawals safely and pay the tax on their profits.
I don’t mind paying income taxes, but we shouldn’t have to pay taxes for transactions to purchase goods and services with your crypto.
For example, it’s unfair to pay taxes when you use crypto to buy dog food with DOGE.
However, if you put $1,000 into Binance and a year later take out $10,000, you should pay income tax on the $9,000 profit, minus transaction fees and other expenses, if you conduct your trading as a business and use a Schedule C.
Yet, there are other reasons for regulation within the crypto community.
First, as stated above, it has become a medium for payment. But, not all transactions should be tax events.
Second, there are many scams and hacks involving crypto coins. Regulations need to reduce these incidents that hurt traders and users.
Third, as in the case of UST and LUNA/LUNC, when the technology behind cryptocurrency is flawed or unstable, regulators must step in immediately to freeze trading, as it is done on stock exchanges.
Fourth, not everyone should be able to create and sell crypto, particularly those without a project or purpose. Exchanges, in particular, must be closely monitored for fraud, rug pulls, and other scams.
Likewise, those with a criminal records shouldn’t be able to start an exchange, and once shut down for irregularities, they shouldn’t be able to change the name and keep operating.
Finally, the CFTC, SEC, or another agency should be set up to answer investor complaints against exchanges that refuse to allow withdrawals or participate in rug pulls.
Taxpayer dollars would be much better spent regulating these issues than the massive lawsuit against Ripple Labs, for instance.
Regulation of cryptocurrency is likely inevitable, especially given the popularity of this technology. However, we shouldn’t view it as a bad thing.
With government oversight, there will be more security and transparency in the crypto world. This could be beneficial for all parties involved, and something we must welcome because the industry will not develop to its full potential without some regulation.
DISCLAIMER: This article is for entertainment and informational purposes only. It should not be considered financial or legal advice. Not all information will be accurate. I am not a financial adviser, and you should consider anything I write as informational and friendly banter to show you what is possible if you invest your money in these vehicles. However, there are no guarantees. Consult a financial professional before making any significant financial decisions.
Note: This post contains affiliate links. Read my disclosure statement for additional information.
Stephen Dalton is a retired US Army First Sergeant with a degree in journalism from the University of Maryland and a Certified US English Chicago Manual of Style Editor. Also, a Top Writer in Nutrition, Investing, Travel, Fiction, Transportation, VR, NFL, Design, Creativity, and Short Story.
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