Terraform: crypto collapses lessen pressure on banks and regulators


Anti-authoritarian crypto fans are finding out where power really lies. South Korea has banned some employees of Terraform Labs from leaving the country. This unusually strict measure suggests prosecutors are escalating a probe into the spectacular collapse of the TerraUSD stablecoin.

You can almost hear the sighs of relief from so-called “Tradfi” at worldwide reversals for the crypto sector. The pressure is off central bankers to develop digital currencies. Regulators face an easier task reining in an industry battered by price collapses they warned about.

Terraform’s Luna token was once one of the top 10 global cryptocurrencies by market value. It gained over 12,000 per cent in the span of a year. It lost 99.99 per cent of its value in just 48 hours after its paired stablecoin TerraUSD crashed.

Investors had been promised a 20 per cent yield for depositing their TerraUSD coins. Instead, they lost more than $45bn.

Korean authorities are investigating Do Kwon, outspoken co-founder of Terraform Labs. One line of inquiry is alleged tax evasion. Another is alleged embezzlement from the company’s bitcoin holdings. The entrepreneur has said he is innocent of any wrongdoing.

Lawsuits brought by investors could set a wider pattern. They typically claim that TerraUSD depended on incomplete algorithms, vulnerable in times of market declines. Legislation covering digital assets is scanty worldwide, however. That reduces investor protection. For the most part, crypto companies such as Terraform are not even classified as financial institutions.

Terraform’s collapse and the gating of withdrawals by Celsius Network, a crypto lender, have rattled the industry. It was already spooked by bitcoin’s fall of over a half in response to sliding stock prices.

For traditional finance, crypto woes could not have materialised in a handier form. They have disproved claims that prices were uncorrelated to conventional assets. They have shown that investors can easily lose their shirts. And they have had little spillover because the sector is still relatively unconnected and small. For example, the total value of stablecoin assets of around $190bn is less than one per cent of the $50tn market value of US equities.

Regulators cannot dodge every bullet. Investors happy to bank unregulated gains still seek recompense for unregulated losses. Proliferating class-action lawsuits demonstrate this.

In the aftermath of the current shakeout, financial watchdogs around the world will need to carve regulated territory from the crypto badlands. Resistance should be helpfully low.

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