The UST and Luna crashes have given more ammunition for the government to regulate crypto trading
It has been over a month since crypto-assets TerraUSD (UST) and Luno crashed.
To explain the crashes in simple terms, in early May, the UST stablecoin — pegged against the US dollar — was trading at US$80 a coin, but it tanked to 35 cents following a massive sell-off. Its sister currency Luna also dropped and became almost worthless.
Some experts say the crypto crashes were not surprising — there was a bubble of irrational exuberance in cryptocurrency, which was already starting to deflate even before UST and Luna plunged.
While the crashes have rattled the market, industry watchers feel such events are healthy and necessary for the long-term future of cryptocurrency. Moreover, they will encourage many investors to think and analyse opportunities carefully.
On the flip side, the crashes have given more ammunition to policymakers globally to regulate the trading of cryptocurrencies. The US government is already seized of the matter and believes that regulation is essential to protect investors’ interest and guard them against financial contagion.
Also Read: What the fall of Terra Luna and the Asian financial crisis have in common
But the moot question is: can regulation alone restore people’s confidence in digital assets?
“Surely, governments will attempt to regulate crypto trading,” says Eddie Thai, General Partner of Ascend Vietnam Ventures, an early backer of Axie Infinity. “Some regulations may be necessary to restore confidence in the eyes of many retail investors. But I don’t think regulation will be the primary driver of overall investment interest in crypto versus potential financial gains and other factors.”
In any new space, he adds, governments often struggle to design and enforce well-balanced regulation; crypto is even harder to regulate effectively because of its fundamental design. “It’s this design that attracts a lot of crypto investors. Confidence will be gained back as investors become more knowledgeable about cryptocurrencies and their risks and as builders improve their design and execution.”
Even before the UST crashed, several governments had begun examining crypto regulations. For instance, Singapore in April approved legislation to tighten rules for cryptocurrency providers. The new law requires virtual asset service providers in the country which only do business overseas to be licensed.
Malaysia has also made it clear that it has no intention of recognising cryptocurrencies as legal tender.
“This crash will likely increase the urgency of governments and regulators to hasten their work on regulations,” opines Bobby Ong, Co-Founder and COO of CoinGecko, an independent cryptocurrency data aggregator. “We believe rules, if appropriate and proportionate, could help eliminate some outright scams so real projects could flourish. Beyond that, it is up to the projects to build sustainable offerings that will gain investors’ trust and confidence.”
Certainly, policymakers are worried and are taking every step to regulate and protect investors from potential losses in the future. However, many governments are still in the dark and have a vague idea about the differences between digital assets.
“What is more important is that governments are educated about the differences between various assets. A few regulated (private or public) stablecoins (like USDC) can emerge as default stablecoins,” says Kenrick Drijkoningen, General Partner at Web3 investor Play Future Fund.
Agrees Chris Sirise, Partner at Saison Capital: “Regulatory frameworks will be an essential driver of confidence in the sector. There are many mechanisms for a stablecoin to maintain its peg. Having one approved by regulators and audited by reputable third parties on an ongoing basis will increase confidence significantly. However, there is still a case to be made for decentralised stablecoins. That category will take time to rebuild trust, especially among retail investors.”
As all the experts mentioned above indicate that crypto should be regulated for the benefit of retail investors. But is regulation really possible?
Also Read: The 27 Web3 startups in Singapore that show crypto is more than Terra Luna and stablecoins
“To be very honest, from a functional and execution point of view, it’s impossible to regulate crypto markets. It is like a ‘casino’ that cannot be shut down,” says Elvin Zhang, Executive Director at Startech Global Ventures (part of Sinarmas Group).
As for the expected RoI, he says above traditional average (50 per cent annual internal rate of returns) can still exist in the semi-regulated ‘casino-like’ asset class. “Normal core productivity-related returns (less than 50 per cent) will veer back towards the regulated financial markets, and seasoned investors will find the two more and more differentiated when forming asset allocation strategies. General population confidence should then follow the above asset class bifurcation as well.”
But still, it is impossible to shut off something that is truly decentralised finance. The only thing governments can do is to control the valve that pumps money into the crypto markets. “But there is already capital control, meaning if you get money through some dark web, you are subjected to money laundering regulations. So that is the maximum governments can do,” Zhang says.
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Copyright: fellowneko
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