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Crypto-Crash Prompts Push for Greater Regulation That Could Enhance Market Credibility

Leading authorities have called for stronger regulation of cryptocurrencies in the wake of the recent Terra-Luna wipeout, which served as the trigger for a broader digital asset collapse.  

US Securities and Exchange Commissioner Hester Peirce told CNBC that regulators had “dropped the ball” when it comes to cryptocurrencies, and failed to create a regulatory environment that is conducive to its healthy development.  

“There’s a lot of fraud in this space, because it’s the hot area of the moment,” said Peirce at the sidelines of the DC Blockchain Summit this week.  

“We’re not allowing innovation to develop and experimentation to happen in a healthy way, and there are long-term consequences of that failure.” 

The Securities and Exchange Commission (SEC) has recently sought to affirm its powers with regard to the regulation of digital assets, with Chair Gary Gensler telling the House Appropriations Committee that the authority exercises jurisdiction over “probably a vast number” of cryptocurrencies.  

The US is far from the only economy seeing a push for greater regulation of crypto from top finance authorities.  

Leading finance and central bank officials from the Group of Seven (G7) nations have just issued a joint call for better regulation of digital assets, as well as greater international coordination between different authorities.  

“The G7 supports work by the Financial Stability Board (FSB) to monitor and address financial stability risks arising from all forms of crypto-assets, and welcomes increasing global cooperation to address regulatory issues associated with the use of crypto-assets,” said a communique issued to summarise the conclusions of a meeting of G7 officials convened in Bonn and Königswinter, Germany, on 18 – 20 May.  

In Australia, newly elected Prime Minister Anthony Albanese has also made the regulation of cryptocurrencies one of this top policy priorities for his first 100 days in office.  

The push for greater regulation arrives following a disastrous performance for cryptocurrencies since the start of 2022, amidst heightened economic uncertainty caused by the Covid pandemic, as well as worsening geopolitical tensions in the wake of Russia’s military actions in Ukraine.  

The poor showing of cryptos came to a head with the recent collapse of the Terra stablecoin, with many alleging that it was the result of manipulation by short sellers seeking to crash the price of Bitcoin.  

Bitcoin fell to around USD$25,500 during the recent market collapse, and is currently hovering around the key $30,000 threshold, for a near 40% decline since the start of 2022.  

While supporters of crypto have long contended that they can serve as a hedge against declines in other major investment classes such as equities, the performance of Bitcoin in 2022 has instead been strongly correlated with sharp declines in US stock indices.  

The introduction of robust regulatory measures would at first blush appear to run contrary to the original spirit of blockchain-based cryptocurrencies and Bitcoin, given that their initial appeal lay in the possibility of creating a monetary system that lay beyond the control of nation-state governments.   

Stronger regulation could have the effect of providing long-term support to cryptocurrencies, by enhancing trust and security for a broader demographic of investors, as well as further legitimising them as assets in the eyes of the market.