The United States (US) released a well-timed comprehensive bipartisan cryptocurrency (crypto) bill on 7th June 2022. What will be the future of crypto in the US and what can Nepal learn from the US?
More than 50 countries including Nepal have banned cryptos stating the need to protect many of the naïve investors in the highly volatile crypto market. Perhaps, cryptos could also undermine the sovereignty of monetary policy. Since the crypto industry existed outside of the legal framework, its relationship with the government has always been that of suspicion even though the global cryptocurrency market was valued at $2.5 trillion before last May’s crypto crash. The post-crash crypto space, filled with regulatory uncertainty, was anxiously waiting for the government for a hint about the future direction of crypto through clear regulatory guidelines. Sensing the mood of the market, the US Government quickly revealed a 69-page comprehensive bipartisan crypto bill aiming to address many corners of the extremely nervous post-crash crypto sector.
Even though volatility is baked into the nascent crypto market, the US Government felt the urgency to bring forward the crypto bill because an estimated USD 45 billion in investor funds were erased in a very short time with no accountability when the so-called stablecoin Terra USD (UST) imploded. Billions of dollars of crypto wealth have evaporated sending shockwaves throughout the market. On 9th May 2022, after nearly 18 months of steadily holding its value against the US dollar, the UST coin, designed to retain a value of USD 1 at all times, was de-pegged from the US dollar, crashing the Terra (LUNA) crypto token from USD 120 to USD$ 0.02 (a 9.99% correction) within 48 hours of a black swan event of 11th and 12th May.
In short, LUNA crashed due to its link to UST - a stablecoin pegged to the US dollar. LUNA is regular crypto while UST is an algorithmic stablecoin that is not backed by actual US dollars. Once UST lost its peg to the US dollar, the trust was gone and everyone started to panic and sell. Luna Foundation Guard, a fund set up by Terra creator Do Kwon, had accumulated a total of more than 80,000 Bitcoins, which was worth nearly US$ 3 billion around the time Terra slumped. Kwon had promised to use Bitcoin in the event of a dramatic fall in the value of UST. The foundation spent almost all of the Bitcoin in its reserve in a futile attempt to save UST, but LUNA still collapsed, evaporating US$ 45 billion worth of investor money.
The US Government immediately sounded alarm bells on stablecoins. Once the UST lost its peg to the US dollar, Treasury Secretary Janet Yellen, during the House Committee meeting on May 10, 2022, discussed crypto’s threat to the current international payment architecture and also called for a stablecoin regulation to guard against the risks. Also, the Treasury Department announced that it will be taking steps to require any transfer of cryptos valued at $10,000 or more to be reported to the Internal Revenue Service (IRS). Around the same time, Federal Reserve Chairman Jerome Powell also warned about the potential risks cryptos pose to the financial system.
Last September, the People’s Bank of China (PBOC) banned all cryptocurrency transactions and mining citing the role of cryptos as an enabler of financial crimes as well as posing a growing risk to China’s financial system owing to their highly speculative nature. Interestingly, despite the ban, China still hosts 21% of the total global Bitcoin hash rate even after Autumn’s ban and has now emerged as the world’s 2nd top Bitcoin mining hub. Last May’s crypto crash created a greater panic because many felt the US government would also take similar tough regulatory measures on crypto taken by the Chinese government.
The US Government decided to take a positive step toward regulating the crypto industry to tame the chaos surrounding the space, sending a clear message to the world that overregulation or even a ban is not the American way. The proposed crypto bill titled “The Responsible Financial Act'' sponsored by US Senators Cynthia Lummis from Wyoming, and Kristen Gillibrand from New York aims to install guide rails around the digital asset space. Both the Senators have been working extensively on the bill for quite some time, but they decided to reveal the bill when the industry was confused about the future direction of cryptos in the US.
The spirit in which the bipartisan bill was formulated shows that the crypto sector will thrive in the US. According to Senator Lummis, “The United States is the global financial leader, and to ensure the next generation of Americans enjoy the 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.” Likewise, Gillibrand feels, “Digital assets, blockchain technology, and cryptocurrencies have experienced tremendous growth in the past few years and offer substantial potential benefits if harnessed correctly. The United States must play a leading role in developing policy to regulate new financial products, while also encouraging innovation and protecting consumers.” The very fact that the bipartisan crypto bill was released less than a month after last May’s crypto meltdown shows that the US government does not plan to push US-based crypto innovations to other countries by overregulating the thriving sector and intends to maintain US leadership in crypto innovation.
First and foremost, the bill aims to fully integrate digital assets into the financial system. Also, the legislation builds on top of the current regulatory regimes for assets without creating an additional regulatory body solely dedicated to regulating the crypto sector. The legislation clarifies the roles of the two existing US regulators: the US Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). The bill makes a clear distinction between digital assets that are commodities or securities and grants the CFTC exclusive spot market jurisdiction over all fungible digital assets that the bill does not consider to be securities. Also, there is a provision that eliminates the obligation to report crypto gains of US$200 or less to the IRS.
After the recent stablecoin UST crash, the industry was curiously waiting for the government's attitude toward regulating stablecoins. The bill says that “payment stablecoins” must be backed by “not less than 100 percent of the face amount of the liabilities of the institution on payment stablecoins issued by the institution.” Furthermore, the bill “defines payment stablecoins as digital assets that are redeemable on a one-to-one basis with the US dollar or other legal tender, are issued by a business entity, and are accompanied by a statement from the issuer that it is backed by one or more financial non-crypto assets, and are used as a medium of exchange.” The new bill requires all stablecoins to be fully backed by reserves so one stablecoin could always be redeemable for US$1.
Many had invested in UST because they believed stablecoins are pegged to a traditional financial instrument, like the US Dollar, and are supposed to be the crypto equivalent of investing in a conservative money market fund. Many people do not know that there are three types of stablecoins: crypto-backed, fiat-backed, and algorithmic coins. Cryptocurrencies are used as collateral in crypto-backed stablecoins. Fiat-backed stablecoins token is pegged to either USD or Euro. On the other hand, algorithms are used to maintain supply and demand as well as maintain the price with a dollar in algorithmic stablecoins like UST.
Stablecoins are not subject to crazy price fluctuations and overall crypto volatility, making them a more secure investment. The recent stablecoin crash has shown that such is not the case for algorithmic stablecoins for they are not backed by any real-world asset which also means they cannot be considered as stablecoins. Algorithmic stablecoins usually link two coins and then adjust their price depending on the supply and demand of investors. Additionally, algorithmic stablecoins are only pegged to the value of a real-world asset and not backed by them.
The lobbyist close to Washington believes the crypto bill is unlikely to become the law until the spring of 2024 because it will have to go through committees of jurisdiction in the Senate. Still, the crypto industry views the legislation as a great start and the first step toward a much-needed dialogue on Capitol Hill on regulating the nascent space. The industry, as a whole, feels the concepts in the bill are largely positive with many areas needing improvement. Generally speaking, everyone in the sector is extremely happy with Senators Lummis and Gillibrand for laying the groundwork for a holistic set of rules that will add much clarity and certainty for both the industry and regulators so that US leadership in crypto innovation continues.
Despite the government’s hate, crypto is here to stay and the US will most likely continue leading the crypto innovation space. On the other hand, as expected, Nepal, operating with the mindset fit for the 18th Century, is always late to the game, or perhaps even still clueless. The Government of Nepal should do away with the short-term thinking, carefully study the American crypto bill, and work towards legalizing cryptocurrencies in Nepal.