Experts are expecting regulatory scrutiny to increase around the cryptocurrency market following the recent crash of a multibillion-dollar stablecoin, and one analyst said regulation can't come soon enough.
Cryptocurrency is an encrypted digital currency that operates without a bank or federal government to uphold its value. Bitcoin is an example of cryptocurrency, and its value isn't tied to any outside assets, making it more volatile. A stablecoin, however, is a type of cryptocurrency that attempts to maintain value tied to outside assets such as the U.S. dollar and is used to facilitate the trade of other cryptocurrencies.
Last week, the stablecoin known as TerraUSD, which is considered an algorithmic stablecoin with a value matching the U.S. dollar, fell below the U.S. dollar, causing investors to lose confidence in the digital currency and resulting in the loss of billions of dollars.
And that's likely just the beginning of the fallout to be seen from the TerraUSD crash, said James Harris, commercial director of CryptoCompare, a global cryptocurrency market data provider.
"A $40 billion ecosystem falling out, there's going to be more things that will emerge," Harris said during a webinar Thursday on cryptocurrencies hosted by London-based data analytics firm GlobalData Plc.
Regulating cryptocurrency has been a topic of debate at the federal level, with U.S. Treasury Secretary Janet Yellen noting the risks that the unregulated cryptocurrency market poses to financial stability during a Senate Banking Committee hearing May 10.
Along with the financial risk, GlobalData senior analyst Nicklas Nilsson said during the webinar that there are plenty of other reasons the cryptocurrency market needs oversight.
Regulating the cryptocurrency market
Cryptocurrency needs regulation due to risks such as ransomware attacks, market manipulation, scams and many other activities that are harmful to businesses and consumers, Nilsson said. Though there have been multiple Congressional hearings on the topic, the U.S. has yet to adopt a framework for cryptocurrency regulation.
President Joe Biden's Working Group on Financial Markets issued a report in November asking Congressional leaders to establish a federal framework for stablecoins, as well as require stablecoin issuers to be insured financial institutions to protect stablecoin users and investors. Loss of investor confidence in the TerraUSD stablecoin is what contributed to the recent crash.
Meanwhile, U.S. Senate Banking Committee Ranking Member Pat Toomey, R-Penn., proposed legislation in April to establish a new regulatory framework for stablecoins.
Toomey said his legislation "will allow this crypto-innovation to continue flourishing while protecting consumers and minimizing potential risks from stablecoins to the financial system."
Nicklas NilssonSenior analyst, GlobalData Plc
While regulation is moving slowly in the U.S, other countries are moving fast on cryptocurrency regulation.
South Korea, for example, began cryptocurrency regulation that brought the number of available cryptocurrencies down from around 60 to five. The regulation reduced less-established, less serious cryptocurrency vendors -- an issue that poses a challenge in the U.S. with the vast number of unreliable cryptocurrencies available, Nilsson said.
Nilsson said the problem with U.S. cryptocurrency regulation is that policymakers are "looking at what crypto might be in the future rather than regulating the space for what it is now and updating the rules as we go along."
"This is hindering the progress of healthy regulation," he said during the webinar.
Makenzie Holland is a news writer covering big tech and federal regulation. Prior to joining TechTarget, she was a general reporter for the Wilmington StarNews and a crime and education reporter at the Wabash Plain Dealer.