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How Terra’s collapse will impact future stablecoin regulations

The collapse of algorithmic stablecoin UST created a ripple effect not just in the crypto market but among world regulators as well.

The collapse of the Terra ecosystem, which subsequently depegged its algorithmic stablecoin TerraUSD (UST) value and crashed it to an all-time low of $0.30, has cast doubt over the future of not just algorithmic stablecoins but all stablecoins in general.

UST’s success and stability were intertwined with its sibling, LUNA, which creates arbitrage opportunities that, in theory, should keep UST’s price steady. If UST’s price drops below $1, it can be burned in exchange for LUNA, which lowers the supply of UST and raises its price.

Conversely, if UST’s price goes above a dollar, LUNA can be burned in exchange for UST, which increases the supply of UST and decreases its price. As long as conditions are normal and everything functions correctly, this creates both a mechanism and incentive for keeping the price of UST at $1.

Though algorithmic stablecoins are not usually backed by assets such as other stablecoins, the organization responsible for developing UST and the broader Terra ecosystem, the Luna Foundation Guard (LFG), has nevertheless built a war chest of Bitcoin (BTC) to be used in the event that the UST becomes depegged from the United States dollar.

The idea is that if UST’s price ever drops significantly, the BTC can be loaned out to traders who’ll use it to buy UST and push the price back up, repegging it to the dollar. So, when UST went into a deep dive, LFG deployed more than $1.3 billion dollars worth of BTC (42,000 coins at a price of $31,000 each) to traders who were going to use it to purchase UST, creating demand pressure and bolstering its price. However, that couldn’t save the collapsing ecosystem either, and the spiral effect eventually collapsed the price of the LUNA token as well as its stablecoin.

In the aftermath of the collapse, even centralized stablecoins, such as Tether’s USDT, lost their dollar peg, falling to a low of $0.95. Since stablecoins act as a bridge for various decentralized finance ecosystems, the Terra crash led to high volatility in the decentralized finance market.

Justin Rice, vice president of ecosystem at the Stellar Development Foundation, was pretty skeptical of the future of algorithmic stablecoins in light of the UST collapse. He told Cointelegraph:

“What we’re seeing now, and not for the first time, is an optimistic balancing mechanism unraveling due to natural human responses to market conditions. It is challenging to have algorithmic stablecoins keep their peg when things go sideways, and you have to rely on outside intervention to set things right.”

He also advocated for full transparency from stablecoin issuers with third-party audits. Denelle Dixon, CEO and executive director at the Stellar Development Foundation, hoped the recent debacle would push the conversation about stablecoin regulations among lawmakers. She told Cointelegraph:

“We’ve seen significant progress moving the conversation of stablecoin legislation in the United States. We’ve seen bills from both sides of the aisle that understand the issues and can move this industry forward by providing clarity and guardrails. We also know that this is a global issue and think the same rules should apply with respect to stablecoins and are working to help create that consistency.”

Stablecoin regulations around the globe

For a long time, stablecoins have been on the radar of regulators in many major economies, but the UST collapse acted as a catalyst, forcing U.S., South Korean and many European regulators to take note of the vulnerabilities in these not-so-stable digital dollar pegs. 

U.S. regulators are using the incident as grounds to push for more stringent rules around stablecoins and their issuers, with Treasury Secretary Janet Yellen announcing plans for legislation by the end of the year.

Yellen said it would be “highly appropriate” to aim for a “consistent federal framework” on stablecoins by the end of 2022, given the growth of the market. She called for bipartisanship among members of Congress to enact legislation for such a framework.

These could easily be imposed on collateralized stablecoins, such as USD Coin (USDC) and USDT, which are backed by a traditional-style treasury and held by a centralized entity.

Max Kordek, co-founder of blockchain developer platform Lisk, believes the UST collapse will be used by lawmakers to push for central bank digital currencies (CBDC). He told Cointelegraph:

“Trust in algorithmic stablecoins is likely to have greatly diminished because of this incident, and it will be a while before that trust is restored. This will, unfortunately, be used by politicians as an example of why the world requires CBDCs. We don’t need CBDCs; what we do urgently need, though, is reliable, decentralized stablecoins.”

The Congressional Research Service, a legislative agency that supports the U.S. Congress, published a report on algorithmic stablecoins analyzing the UST crash. The research report described the LUNA crash as a “run-like” scenario that lead to several investors pulling out money from the ecosystem at the same time. 

The research paper noted that these conditions in the traditional financial sector are protected by regulations that guard against such scenarios, but without any regulations in place, it might lead to market instability in the crypto ecosystem.

Jonathan Azeroual, vice president of blockchain asset strategy INX, told Cointelegraph:

“Algorithmic stablecoins backed by super volatile assets are especially at risk of a ‘run’ on the funds backing them if investors lose confidence in the mechanism created to ensure its stable value or simply if the value of the assets backing them falls below the amount of stablecoin issued.”

He believes the U.S. government will certainly attempt to expedite their power over regulating stablecoins, as it shows they are not a viable answer to a regulated digital economy. The regulators might require “stablecoins to be issued by federally regulated banks or by regulating them as securities, which will make them be overseen by the SEC [Securities and Exchange Commission].”

David Puth, CEO of the Coinbase-founded Centre Consortium, hoped for constructive regulations in the wake of the UST collapse. He told Cointelegraph:

“The fact remains that stablecoins are a critical piece of the growing crypto ecosystem, and industry organizations in the United States have been vocal about their desire for clear and constructive regulation.”

Puth is hoping for a “thoughtful and pro-innovation regulation that will keep the United States at the forefront of the blockchain economy.”

Apart from the U.S., South Korea is another nation that has gotten serious about stablecoins after the Terra collapse. The founder of Terra, Do Kwon, has been summoned before the country’s legislature for a hearing. A Korean regulatory watchdog has also started risk assessment of various crypto projects operating in the country.

The key lessons 

While regulatory discussions around the stablecoins have gained pace in the light of the UST debacle, it has also highlighted that the crypto market has evolved enough to absorb a $40-billion run-down. This proved that the crypto market has grown enough to absorb a setback as big as Terra without posing a threat to broader market stability.

It’s essential to notice that the collapse of Terra, together with the overall market correction, has led to a cascade of second-order effects, such as increased exchange outflows, a significant spike in liquidations (most obviously in derivatives and decentralized finance), at least a temporary slowdown in DeFi (total-value locked and activity have decreased), and liquid staking issues.

Thomas Brand, head of institutions at Coinmotion — a Finnish virtual asset service provider — told Cointelegraph:

“Regulators, I assume, are especially interested in how crypto, and now especially stablecoin, risks might affect TradFi and CeFi via contagion and (in)direct exposure. Thus far, these risks have not materialized systemically. Still, regulators might pay closer attention to these matters soon — mainly if they conclude that at least some stablecoins remind a form of shadow banking.”

Terra wasn’t at this point a systemic risk but rather, its meltdown was limited, although effects could be seen throughout various interlinked ecosystems. 

Derek Lim, head of crypto insights at Bybit exchange, told Cointelegraph that while the UST collapse has definitely attracted regulator scrutiny, the crypto market managed to recover without seeing colossal damage across the board. He explained:

“I would like to point out that one of the key concerns that U.S. regulators have made clear in several reports is that a stablecoin bank run could destabilize the broader financial system. This incident has shown that a bank run on the third-largest stablecoin by market cap has barely affected the wider crypto markets, let alone the S&P and beyond.”

Terra’s spiral disaster not only highlights the need for transparency from stablecoin issuers but the importance of a regulated market as well. With clear regulations in place, there would have been several gatekeepers to prevent small investors from losing their money. The event has already prompted regulators around the world to take notice. 

The Terra collapse could prove to be a turning point for stablecoin regulations around the globe, quite similar to what Libra’s global stablecoin plans did for CBDCs — i.e., prompting regulators to accelerate their own plans.

Portugal’s Assembleia da Republica says no to two crypto tax bills

The Portuguese Minister of Finance had recently declared that cryptocurrencies in the country will soon be subject to capital gains taxes.

The Portuguese congress, Assembleia da Republica, has rejected two bills that would have imposed a tax on cryptocurrencies.

Portugal has long been regarded as a cryptocurrency tax haven, and the trading of cryptocurrencies has been tax-free since 2018. In addition, trading digital assets is not considered investment income in Portugal. This has attracted crypto startups and events to Lisbon, despite the fact that businesses that accept Bitcoin must pay income tax on it.

The Portuguese Minister of Finance, Fernando Medina, had recently declared that cryptocurrencies in the country will soon be subject to capital gains taxes. However, two separate bills from minor political parties to tax cryptocurrency assets were rejected by the Portuguese Assembleia da Republica.

The news was welcomed by Derek ‘Isaac’ Kaplan, founder of DuoVerse and VMining, who said that any “unreasonable taxation” would have been negative for the cryptocurrency sector’s growth. He told Cointelegraph that:

“While a regulatory framework is important, we need to give the industry the space to grow. Crypto industry is nascent and it shouldn’t be subject to the same rate applicable to capital gains on equivalent income as it will be unfair. This development reflects that crypto-friendly sentiment goes strong in Portugal.”

According to the economic newspaper ECO, the proposals were from left-wing parties Bloco de Esquerda and Livre, which were both rejected during a 2022 budget voting session on Wednesday afternoon. The government was asked to explore taxing crypto profits in excess of €5,000 ($5,345.75).

In Portugal, crypto transactions are not subject to capital gains taxes or any other taxes. In comparison, the current capital gains tax rate for financial investment is 28%. The country’s deputy finance and tax minister Antonio Mendes stated during the same session of parliament that taxing cryptocurrency is a “complex reality,” and capital gains may not be enough.

Related: Portugal to lose crypto tax haven status as state announces gains duties

An emigrant to Portugal in February praised the western Iberian nation’s crypto adoption rate among merchants and even predicted that Bitcoin might one day become legal money there, as reported by Cointelegraph. However, he may have a lot on his mind now that government officials are mulling over how to tax digital assets.

Portugal’s Assembleia da Republica says no to two crypto tax bills

The Portuguese Minister of Finance had recently declared that cryptocurrencies in the country will soon be subject to capital gains taxes.

The Portuguese congress, the Assembleia da Republica, has rejected two bills that would have imposed a tax on cryptocurrencies.

Portugal has long been regarded as a cryptocurrency tax haven, and the trading of cryptocurrencies has been tax-free since 2018. In addition, trading digital assets is not considered investment income in Portugal. This has attracted crypto startups and events to Lisbon, despite the fact that businesses that accept Bitcoin must pay income tax on it.

The Portuguese Minister of Finance, Fernando Medina, had recently declared that cryptocurrencies in the country will soon be subject to capital gains taxes. However, two separate bills from minor political parties to tax cryptocurrency assets were rejected by the Portuguese Assembleia da Republica.

The news was welcomed by Derek “Isaac” Kaplan, founder of DuoVerse and VMining, who said that any “unreasonable taxation” would have been negative for the cryptocurrency sector’s growth. He told Cointelegraph that:

“While a regulatory framework is important, we need to give the industry the space to grow. Crypto industry is nascent and it shouldn’t be subject to the same rate applicable to capital gains on equivalent income as it will be unfair. This development reflects that crypto-friendly sentiment goes strong in Portugal.”

According to the economic newspaper ECO, the proposals were from left-wing parties Bloco de Esquerda and Livre, which were both rejected during a 2022 budget voting session on Wednesday afternoon. The government was asked to explore taxing crypto profits in excess of €5,000 ($5,345.75).

In Portugal, crypto transactions are not subject to capital gains taxes or any other taxes. In comparison, the current capital gains tax rate for financial investment is 28%. The country’s Deputy Finance and Tax Minister Antonio Mendes stated during the same session of parliament that taxing cryptocurrency is a “complex reality,” and capital gains may not be enough.

Related: Portugal to lose crypto tax haven status as state announces gains duties

An emigrant to Portugal in February praised the western Iberian nation’s crypto adoption rate among merchants and even predicted that Bitcoin might one day become legal money there, as reported by Cointelegraph. However, he may have a lot on his mind now that government officials are mulling over how to tax digital assets.

Ideas vs. practice: How are regulators working together on crypto?

While the calls for globally coordinated regulation for cryptocurrencies is a noble effort, the practicality of the situation is far from ideal.

The regulation of cryptocurrencies across the world is a constant battle for investors in a rapidly expanding and constantly changing ecosystem. 

Various regulatory agencies around the world view digital assets in a different light that vary significantly from one another.

Recently, executive board member of the European Central Bank (ECB) Fabio Panetta mentioned in a written statement for a speech to Columbia University that regulators should follow a globally coordinated approach while regulating digital assets. He said that the world should have digital assets regulated by the Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) rules of the Financial Action Task Force.

Panetta also spoke about strengthening public disclosure, reporting on regulatory compliance in the industry and setting up certain “transparency requirements” and “standards of conduct.” He stated:

“We need to make coordinated efforts at the global level to bring crypto-assets into the regulatory purview. And, we need to ensure that they are subject to standards in line with those applied to the financial system. We should make faster progress if we want to ensure that crypto-assets do not trigger a lawless frenzy of risk-taking.”

Practicality of global regulation in question

The ECB applying such rules across the European Union is one thing, and having the same rules apply to the all the countries in the world is a whole other due to the fact that ECB can behave as the regulatory entity in the EU. Still, there is no clear understanding of which regulatory body would have the authority to conduct such coordinated regulatory activities.

Even more recently, Ashley Alder, chair of the International Organization of Securities Commissions — an association of market regulators — spoke about this aspect in an online conference organized by the Official Monetary and Financial Institutions Forum. He elaborated on the need for a joint body that will be tasked with coordinating the regulation of digital assets around the world and could even be a reality within this year.

On May 16, the Basel Institute of Governance and the International Academy of Financial Crime Litigators published a paper that also called for further coordinated action against unlawful crypto markets. The paper suggested that investigators that are involved with cryptocurrencies should invest in learning approaches and technologies to keep up pace with the evolving techniques of criminal organizations and entities.

Cointelegraph spoke with Bianca Veleva, head of legal and regulatory compliance at Nexo — a crypto lending platform — about the advantages of a global regulatory approach. She said:

“The adoption of a unified legal framework and/or principles for crypto-related activities may prove beneficial in terms of accelerating the legislative efforts of countries which have not yet recognized the advantages that the crypto industry brings, following from the comprehensive framework that more forward-looking countries have already adopted and implemented.”

As the digital assets landscape expands and regulations begin to get clearer, a new paradigm could be underway wherein international regulatory consensus unifies. The mass adoption and increasing use-cases of digital assets and blockchain technology alike are bound to provide a solid foundation for the eventuality of a consensus among regulating bodies and nations.

However, there are many countries that have outright banned their citizens from indulging in cryptocurrencies and even their services. A prime example of that would be China, which announced an outright ban on digital assets in September last year. There are a total of nine countries that have banned cryptocurrencies, in addition to China: Algeria, Bangladesh, Egypt, Iraq, Morocco, Nepal, Qatar and Tunisia have a blanket ban on crypto, according to a Law Library of Congress report from November 2021.

Recent: El Salvador’s Bitcoin play: What does the current slump mean for adoption?

This difference in the way various countries view digital assets could serve as the biggest obstacle to a globally coordinated regulatory framework. Igneus Terrenus, policy advocate at Bybit, told Cointelegraph that while a global regulatory system makes sense for tracking fund flows and reducing regulatory arbitrage, the reality is that there is no universal regulatory body capable of imposing it upon sovereign states. Realistically, it will have broader impacts on citizens and residents of countries that responded positively rather than countries that choose not to partake.

Terrenus added that “A blanket framework that fits the whole world does not seem to be attainable given the disparities between countries in even existing financial regulations. A feasible model would focus on easing the exchange of information between entities and jurisdictions, which tax authorities are already doing via the banking system, deploying zero-knowledge proof technology to prevent fraud and improving regulatory clarity and consistency.”

Another aspect to consider in the hypothetical eventuality of globally accepted regulations for cryptocurrencies is that a consensus between various countries at different stages of adoption could lead to innovation being stifled and a plateau in adoption rates. Veleva said:

“Any joint efforts of unifying the currently pending EU regime for crypto-assets with the United State’s legislative framework may be a double-edged sword. They may, in fact, impede the pace of innovation and crypto adoption at an EU level and lead to greater regulatory difficulties for crypto companies.”

Coordination like never before 

Despite the difficulties and challenges involved, some participants in the digital assets ecosystem remain positive about a move toward globally coordinated crypto regulation. 

Justin Choo, group head of compliance of Cabital — a cryptocurrency trading and passive income platform — told Cointelegraph that the current approach that countries have taken couldn’t be more varied when compared with traditional asset classes like equity, debentures and managed investment schemes that work with a regulated framework.

When compared to crypto-forward countries, Choo stated that “I would imagine that a globally coordinated regulatory system wouldn’t go as far ahead as what El Salvador and Argentina are doing simply because the governments of developed countries whose currencies are reserve currencies wouldn’t be ready to give up the economic prowess — which is often used to influence international diplomacy — that they already have in favor of cryptocurrencies.”

Global coordination on crypto regulation will require collaboration within the industry and from regulators across the world in a manner that is never seen before. Terrenus said:

“Paternalistic protections based on decades-old laws may not be the most helpful approach. Truly sensible, meaningful and impactful regulations should encourage transparency when it comes to the terms, ownership breakdown, vesting schedules and accurate representation of annual percentage yield of crypto projects. This would improve the overall information symmetry and reward investors who do their own research.”

Especially after the recent highly-publicized fiasco with the Terra blockchain and its stablecoin, TerraUSD (UST), regulators have begun to take a closer look at the feasibility and viability of stablecoins as well. The European Commission has also revealed its intentions of placing a blanket ban on large-scale stablecoins, considering the massive economic and investor impact that was triggered by the crash of UST and Terra (LUNA) in the Terra blockchain.

Recent: Enforcement and adoption: What do UK’s recent regulatory aims for crypto mean?

As the adoption of digital assets increases, moving from one adoption and innovation cycle to another, the evolving regulatory landscape will be the most vital part of the transition of digital assets penetrating the masses. A global regulatory framework seems like the ideal solution for the transition, but the obstacles set in the way of implementing such a framework will make the transition a long process and it is highly unlikely that it would happen within a year.

Andreessen Horowitz — a crypto-friendly venture capital firm — recently released its “2022 State of Crypto” report, highlighting that the growth of decentralized markets has gone to a total value locked of more than $100 billion just within two years after the concept was first introduced. The report estimates that decentralized finance (DeFi) would be the 31st largest U.S. bank by assets under management.

It is only natural that such a rapidly expanding industry will require regulators and central banks to innovate and evolve at the same pace. Even if a highly laborious globally-coordinated regulatory framework slightly stifles innovation, the protection of investors is always the prime concern for regulatory bodies across the globe.

Enforcement and adoption: What do UK’s recent regulatory aims for crypto mean?

British regulators intend to amplify the enforcement of crypto and make stablecoins a payment method.

In April, the United Kingdom’s Economic and Finance Ministry, also known as Her Majesty’s Treasury, announced its intention to put the United Kingdom at the forefront of technology by bringing stablecoins under the country’s payments regulation — a bold move that looks especially intriguing in contrast to the recent shock, caused by TerraUSD’s (UST) depegging.

Later, in May, during the annual Queen’s Speech, Prince Charles informed the Parliament about two bills that will support “the safe adoption of cryptocurrencies” and “create powers to more quickly and easily seize and recover crypto assets.”

Taken together, these initiatives give an impression of the nation’s growing interest in digital assets, which comes as no surprise, given the inevitable competition for innovation with the European Union.

The last few months were busy for crypto in Great Britain. Besides some important precedents being set such as the High Court’s decision to recognize nonfungible tokens (NFTs) as property or the listing of Grayscale’s first European ETF on the London Stock Exchange, we witnessed some major announcements by regulators. 

The Treasury’s affair with stablecoins

In its announcement on April 4, following a several-month public consultation, the Treasury acknowledged that certain stablecoins could become “a widespread means of payment” for retail customers. It also stated its readiness to “take the necessary legislative steps” to bring stablecoins into a comprehensible regulatory framework.

As the head of tax at Koinly, Tony Dhanjal, explained to Cointelegraph, this announcement should be regarded as huge news or even a game-changer because it will lead to the reclassification of stablecoins in the U.K.:

“Once stablecoins are no longer subject to capital gains tax, spending crypto could become a lot more widespread and we could see the adoption of crypto as a means of payment in mainstream industries.”

The intentions voiced by the Treasury weren’t limited solely to stablecoins; the financial regulator also teased the launch of a Cryptoasset Engagement Group, which will consult with the industry stakeholders; reassessing the country’s tax system in regard to crypto, establishing a “financial market infrastructure sandbox” and even the Royal Mint’s very own NFT. 

Even the infamous market crash on the second week of May, particularly painful to the stablecoins’ original promise of zero volatility, didn’t discourage the Treasury. According to the Independent, legislation to make stablecoins a means of payment would be included in the Financial Services and Markets Bill.

What is known now is that the Treasury doesn’t plan to include algorithmic stablecoins, such as UST, in this legislation — only fully-backed stablecoins like Tether (USDT) or USD Coin (USDC) are being considered.

Recent: Genomics company explores NFTs in hopes of advancing precision medicine

Seize and recover

The aforementioned Financial Services and Markets Bill, which would possibly include the guidelines for stablecoins, occurred as a part of the Queen’s Speech — a package of 38 legislative projects that was announced to the Parliament on May 10. 

In its current form, it doesn’t tell much, though the very language sounds rather benevolent for the industry. The bill aims at “harnessing the opportunities of innovative technologies in financial services,” including:

“Supporting the safe adoption of cryptocurrencies and resilient outsourcing to technology providers.”

For now, the key point of the bill’s announcement is the intention to craft a national framework which wouldn’t copy the EU’s. While it would initially apply to the traditional finance sector, similar requirements for crypto assets are expected. 

The Eastern end of Government Offices Great George St, where Her Majesty’s Treasury is located. Source: Carlos Delgado

Another part of the Queen’s Speech that bodes significant for the crypto industry is the Economic Crime and Corporate Transparency Bill. At first sight, it doesn’t sound that amicable to the digital currencies, referring to them in a list of the risk zones where British enforcers are going to tighten their grip. As the only line mentioning crypto goes, the bill would create powers to:

“More quickly and easily seize and recover crypto assets, which are the principal medium used for ransomware.”

While the “principle medium for ransomware” is not exactly benevolent wording, the existence of a body that could not only seize, but also actually recover the funds in crypto would bolster the market. 

“A huge step for the UK”

The general perception in the U.K. crypto community is a positive one, Djahal said. There is still a commonly held belief that crypto is a criminals’ paradise hence the regulation is welcome, he believes:

“It’s not that existing powers cannot seize the ransomware money, but Anti-Money Laundering legislation enacted in 2002 way before crypto was incepted, is perhaps just not fit for purpose in the cryptoverse.”

Benjamin Whitby, head of regulatory affairs at Qredo, tends to agree on that matter. He told Cointelegraph:

“I feel the recognition of the space in this proposal is hugely positive, recognizing the asset class will unlock the opportunity for more fintech firms to start working crypto assets into their technology stack.”

While the ambition to develop effective enforcement still might be perceived as somewhat ambivalent at this point, experts are excited about the announced stablecoin recognition. Whitby called it “a huge step for the U.K.,” but said we shouldn’t kid ourselves that “everything will be smooth sailing:”

“It’s vital people that have a position they can move to for safety, with regulated stablecoins we can move into a T0 settlement world and reduce the burden on the creaking and fragile traditional infrastructures.”

Dhanjal believes that the British financial authorities might even seek their own stablecoin, which would pretty much resemble a central bank digital currency (CBDC) — a government-backed “Britcoin” that will be pegged to the Great British pound. The intent here is to maintain financial stability and address the volatility inherent in crypto, he states:

“With appropriate regulation, a Britcoin could provide a more efficient means of payment and widen consumer choice, particularly in the emerging decentralized financial system.”

Make Britain great again?

It is hard not to compare the U.K. with its continental neighbor now that they are separate and have to compete with each other for talent and innovation. The very spirit of the Queen’s Speech draws on that comparison, stating its mission to “make the most of our Brexit freedoms” or “seize the benefits of Brexit” — overall, the word “Brexit” is mentioned 20 times. The U.K. could and would innovate and adopt faster than many jurisdictions, Whitby believes, and the move away from the EU regulatory process allows it to act faster:

“Crypto assets unlock faster settlement, remove credit risk and drop settlement times to near zero, it’s a huge win for commerce and the U.K. has set the intent it will take the front foot. The U.K. has a long history of exploring boundaries, crossing oceans in tiny ships, insuring risk and forming new ventures — crypto is no different.” 

Dhanjal is confident that the U.K. has a high chance of out-competing its continental neighbors, as it possesses a centuries-old heritage in financial services, a deep talent pool and experience from all over the world across the financial sector and startups. In his opinion, the U.K. is unwilling to adopt the general spirit of EU regulations, and that is good news for the country.

“Now that the shackles of the EU have been removed through Brexit, the U.K. can accelerate through the gears in becoming a world leader in crypto innovation and adoption,” he said.

Recent: Crypto inheritance: Are HODLers doomed to rely on centralized options?

Gilbert Hill, the chief strategy officer at blockchain-based data aggregation platform Pool, told Cointelegraph that U.K. authorities are genuine in their efforts to create a haven for starting and scaling crypto companies, but, in his estimate, not all of them are efficient.

In particular, he finds the current regulatory sandbox inflexible and said that it has rejected two-thirds of applicants, which has already resulted in a drain of some of the best projects to the European mainland. Hill also emphasized the strong sides of the European approach:

“In a nutshell, the EU is putting data reform at the heart of its strategy with the aim of busting silos worth 300 billion euro a year, and a set of new laws covering everything from AI through to internet gatekeepers and data unions, all a new source of high-quality intel to build better Web3 products.”

To become a future leader, Hill stated, the U.K. needs the same degree of political will “shown on the mainland” and to break free from the inflexible FCA/sandbox model. Hopefully, the spirit of competition and the urge to justify its separation from the continent will help the nation to make the right decisions. 

Biden’s pick for Fed vice chair for supervision calls for congressional action on stablecoins

Fed nominee Michael Barr said that the government agency potentially releasing a central bank digital currency was an issue that required “a lot more thought and study.”

Michael Barr, a law professor and former advisory board member of Ripple Labs who is United States President Joe Biden’s pick for vice chair for supervision at the Federal Reserve, called for U.S. lawmakers to regulate stablecoins in an effort to address “financial stability risks.”

In a confirmation hearing before the Senate Banking Committee on Thursday, Barr said innovative technologies including cryptocurrencies had “some potential for upside in terms of economic benefit” but also “some significant risks,” citing the need for a regulatory framework on stablecoins to prevent the risk of runs. Barr added that the Fed potentially releasing a central bank digital currency was an issue that required “a lot more thought and study,” echoing Fed chair Jerome Powell’s views concerning due diligence.

Prospective Fed vice chair for supervision Michael Barr addressing the U.S. Senate Banking Committee on Thursday

According to Barr, “other agencies” within the U.S. government were responsible for addressing investor protection around cryptocurrencies. In attendance at the same hearing were prospective commissioners for the Securities and Exchange Commission — Jaime Lizárraga and Mark Uyeda — who, if confirmed, would serve under chair Gary Gensler. 

Responding to questioning from Massachusetts Senator Elizabeth Warren at the hearing, Barr confirmed that he would not work in “any financial services company” potentially having assets under the Federal Reserve’s purview for four years following his prospective time at the government agency. Warren cited the recent market volatility, which included TerraUSD (UST) depegging from the dollar and then attacked unnamed celebrities for endorsing certain crypto projects.

“Any investment involves risk — that’s how markets work,” said Warren. “But a market without rules is theft, and right now regular investors in stablecoins and crypto aren’t getting the baseline protections available in other financial markets.”

Related: Bitcoin shakes off Fed volatility as analysts remain split on return under $24K

Barr was Biden’s second nomination for Fed vice chair for supervision following the withdrawal of Sarah Bloom Raskin in March. If approved by the full Senate, Barr’s position at the Fed would allow him to help develop policy recommendations on supervision and regulation for other board members, including governors Michelle Bowman, Christopher Waller, Lisa Cook and Philip Jefferson, vice-chair Lael Brainard, and chair Powell — the latter four of which were confirmed in May. 

The vice chair for supervision position at the Fed has been vacant since governor Randal Quarles’ term ended in October 2021.

SEC chair uses crypto enforcement in justification for FY2023 budget

“We’re not trying to grow really significantly, but resources to grow at least six percent to grow our enforcement arm in this space,” said Gary Gensler.

Gary Gensler, Chair of the United States Securities and Exchange Commission, or SEC, has cited concerns about cryptocurrency enforcement in its budget request for the next fiscal year.

In written testimony for a Wednesday hearing of the U.S. House Committee on Appropriations, Gensler said he supported President Joe Biden’s request to budget more than $2.1 billion for the SEC in FY2023, allowing the regulatory body to increase its enforcement division by 50 people. The SEC chair cited concerns about the crypto space, referring to markets as “highly volatile and speculative,” as well as the need for “new tools and expertise” to address enforcement.

“The additional staff will provide the Division with more capacity to investigate misconduct and accelerate enforcement actions,” said Gensler. “It also will strengthen our litigation support, bolster the capabilities of the Crypto Assets and Cyber Unit, and investigate the tens of thousands of tips, complaints, and referrals we receive from the public.”

SEC Chair Gary Gensler addressing the U.S. House Committee on Appropriations on Wednesday

Addressing Michigan Representative Brenda Lawrence at the hearing, Gensler reiterated his view that “most” offerings from token projects fell under the SEC’s regulatory purview as securities and should be registered accordingly. According to the SEC chair, investors were currently “not well protected,” given the regulatory body’s limitations on enforcement: 

“We’ll use our enforcement tools to bring enforcement actions [against crypto trading platforms], but I prefer if they come in […] We’re not trying to grow really significantly, but resources to grow at least six percent to grow our enforcement arm in this space.”

Gensler later added he wanted more funding to dedicate to issues related to the growing crypto space, citing 85-90 enforcement actions the SEC had brought against digital asset firms in the last year. He also referred to the recent price volatility of a crypto asset “that went from $50 billion of value to near zero just in the last three weeks,” possibly referring to TerraUSD (UST).

Related: SEC doubles down on crypto regulation by expanding unit

The recent volatility among major cryptocurrencies, including Bitcoin (BTC) and Ether (ETH) and following the collapse of Terra (LUNA), has caught the attention of more than a few regulators and lawmakers in the United States. On May 12, Treasury Secretary Janet Yellen addressed the House Financial Services Committee, including in her testimony that TerraUSD (UST) and Tether (USDT) depegging from the U.S. dollar was not a “real threat to financial stability” given the scale of the stablecoin market.

Global financial regulators will discuss crypto at G7: Report

Bank of France Governor François Villeroy de Galhau reportedly said that the recent crypto market volatility had been a “wake-up call” for global regulators.

Central bank governors and finance ministers from the Group of Seven, or G7, are reportedly planning to discuss the regulation of cryptocurrencies.

According to a Tuesday report from Reuters, Bank of France Governor François Villeroy de Galhau said representatives from the United States, Canada, Japan, Germany, France, Italy and the United Kingdom will likely speak on issues related to a regulatory framework for cryptocurrencies at a meeting in Germany’s cities of Bonn and Königswinter starting on Wednesday. Villeroy reportedly said that the recent crypto market volatility — likely referring to some stablecoins depegging from the U.S. dollar and prices of major tokens dropping — had been a “wake-up call” for global regulators.

“Europe paved the way with MiCA,” said Villeroy at an emerging markets conference in Paris, referring to the European Parliament’s legislation aimed at forming a regulatory framework on crypto. “We will probably […] discuss these issues among many others at the G7 meeting in Germany this week.”

The Bank of France governor added in a speech to the Emerging Market Forum in Paris on Tuesday:

“Crypto assets could disrupt the international financial system if they are not regulated, overseen and interoperable in a consistent and appropriate manner across jurisdictions.”

According to the G7 website, finance ministers and central bank governors will meet in Germany from May 18–20 to discuss policies related to member nations’ recovery and financial stability due to the COVID-19 pandemic, “shaping the upcoming transformation processes in the context of digitalization and climate neutrality,” and business policy at the International Monetary Fund. The group issued guidelines around the possible rollout of central bank digital currencies in 2021 and reportedly warned that certain stablecoins could threaten the global financial system in 2019.

Related: Bank of Japan official calls for G7 nations to adopt common crypto regulations

Villeroy has previously urged EU officials to develop a regulatory framework given crypto’s growing role in regional markets, saying they only had “one or two years” to act. Prior to his election victory in France, Emmanuel Macron said he supported the European Parliament’s recent efforts to regulate crypto — including MiCA — adding that any rules should not hinder innovation.

CBDC activity heats up, but few projects move beyond pilot stage

Does government-issued digital money pose an existential threat to cryptocurrencies? Probably not, but stablecoin usage could narrow.

Government-issued electronic currency seems to be an idea whose time has come. 

“More than half of the world’s central banks are now developing digital currencies or running concrete experiments on them,” reported the Bank for International Settlements, or BIS, in early May — something that would have been unthinkable only a few years ago.

The BIS also found that nine out of ten central banks were exploring central bank digital currencies, or CBDCs, in some form or other, according to its survey of 81 central banks conducted last autumn but just published.

Many were taken aback by the progress. “It is truly remarkable that some 90% of central banks are doing work on CBDCs,” Ross Buckley, KPMG-KWM professor of disruptive innovation at the University of New South Wales, Sydney, told Cointelegraph. “The year-on-year growth in this field is extraordinary.”

“What I found most surprising was the speed at which advanced economies were moving toward retail CBDCs,” Franklin Noll, president at Noll Historical Consulting, LLC, told Cointelegraph. “As recently as the middle of last year, central banks in advanced economies were taking a rather relaxed view of CBDCs, not seeing them as particularly necessary or worthy of much attention.”

Momentum accelerated last year, the report observed. After the Bahamas launched the world’s first live retail CBDC — the Sand Dollar — in 2020, Nigeria followed in 2021 with its own electronic money, the eNaira. Meanwhile, the Eastern Caribbean and China released pilot versions of their digital currencies, DCash and e-CNY, respectively. “And there is likely more to come: a record share of central banks in the survey — 90% — is engaged in some form of CBDC work,” said the BIS.

The Bahamas struggles, Sweden deliberates, Chile delays

Implementing a successful CBDC may be easier said than done, however. The Bahamas’ new digital money has struggled to gain traction, accounting for less than 0.1% of currency in circulation in that island nation, the International Monetary Fund said in March, and “there are limited avenues to use the Sand Dollar.” More education of the populace is needed, said the IMF, a challenge that other government-issued electronic currencies will probably face as well. 

Sweden’s central bank, the Riksbank, has been researching, discussing and experimenting with digital currencies longer than most. Its e-krona project began in 2017, and a pilot program, launched in 2020, is now in its second phase. Carl-Andreas Claussen, a senior advisor in the Riksbank’s payments department, told Cointelegraph that there are lots of reasons why central banks might want to implement a CBDC, but “at the Riksbank, it is first of all the decline in Sweden’s use of cash.”

Sweden is racing toward becoming the Western world’s first cashless society. From 2010 to 2020, the proportion of Swedes using cash fell from 39% to 9%, according to the Riksbank. But, this also raises questions. As Claussen told Cointelegraph:

“If physical cash disappears, the public will not have access to central bank money anymore. That will be a serious change from how it has been over the last 400 years in Sweden. With an e-krona, the Riksbank will offer central bank money that the public can use.”

Still, nothing has been decided in Sweden. “It is not clear that we will need it,” Claussen said. “So first, we have to sort out if we need it at all and if it is worthwhile to do it. We are not there yet.” 

Claussen has little doubt, however, that if a modern government decides to issue a digital currency it can succeed. It will need to be sure that it really needs a CBDC, however. “Neither the Riksbank nor the larger central banks around the world have decided whether or not to issue a CBDC,” he declared. Not even China? “I have not heard that they have made a final decision to issue,” he told Cointelegraph.

Riksbankshuset, the headquarters of the Swedish National Bank in Stockholm. Source: Arild Vågen

Elsewhere, Chile announced last week that it was delaying the rollout of its CBDC, explaining that a government-issued digital peso required more study. Chile is looking to develop a national payment system that is “inclusive, resilient, and protects people’s information,” according to a report. But, its central bank said that it still doesn’t have enough information to make a final decision on it.

According to CBDC Tracker, only the Bahamas and Nigeria have progressed to full CBDC “launch” in the real world, while 2022 thus far has seen more canceled projects like Singapore’s Project Orchid than full roll-outs. On the other hand, only five “pilot” programs were underway in January 2020, compared with 15 in May 2022, which suggests more launches could be imminent.

Related: Blockchains are forever: DLT makes diamond industry more transparent

What is driving the trend?

The BIS sees different motivating factors behind this “growing momentum” toward CBDCs. Advanced economies tend to be interested in improving domestic payment efficiencies and safety, while maintaining financial stability. Poorer economies, emerging markets or developing economies, by comparison, may focus more on financial inclusivity, or look for ways to enable people who have never had a bank account to participate in the economy.

Andrey Kocevski, co-founder at WhisperCash.com — whose firm has developed a digital bearer instrument that could be used by CBDCs — agreed that developing countries usually “want to compensate for the lack of private sector fintech or payment companies and to increase financial inclusion for the unbanked,” further telling Cointelegraph:

“I am not surprised that the number of central banks exploring digital currencies is at 90% now, considering last year it was 80% and in 2018 it was around 30%.”

“For advanced economies, the catalyst was stablecoins,” said Noll, adding that 2021 was “the year of the stablecoin.” Central banks in the developed world began taking seriously the possibility that stablecoins could make headway against fiat currencies, threatening their monopoly on money and disrupting monetary policy potentially, he said.

As for BIS’ contention that the COVID-19 pandemic may have been a prod, “I do not see much evidence for the impact of COVID-19 and a flight from cash driving new interest in CBDCs,” added Noll. “Cash usage remains strong and may be rebounding to pre-pandemic levels.”

Peer pressure, too, could be a factor — yes, even among central bankers. As Buckley told Cointelegraph:

“If one’s major competitor countries do this, everyone feels the need to follow or risk being left behind — some form of sophisticated FOMO.”

Kocevski seemed to agree: “Central banks in developed countries feel the need to digitize in order to stay relevant.”

Could state-run digital currencies co-opt crypto?

Where do cryptocurrencies figure in all this? Just to be clear, government digital money is typically issued in the currency unit of the land such as pesos in Chile, and dollars in the United States, and is a “liability” of the central bank. Cryptocurrencies, by comparison, have their own currency “unit” — like Ether (ETH) — and are private digital assets with no claim on the central bank. 

According to the BIS survey, most central banks see payment networks like Bitcoin and Ethereum posing little threat to their activities, and stablecoins even less: “Most central banks in the survey still perceive the use of cryptocurrencies for payments to be trivial or limited to niche groups.”

Still, couldn’t CBDCs pose an existential danger to cryptocurrencies at some point? “A year ago I thought they would — now I don’t,” Buckley told Cointelegraph. CBDCs are essentially payment instruments, while cryptocurrencies are more like speculative assets. “These new instruments will not represent an existential threat to Bitcoin and the like, but they will make it harder for Bitcoin to argue for itself as anything other than a speculative play,” he said.

Gourav Roy, a senior analyst at the Boston Consulting Group in India, who also contributes to CBDC Tracker, told Cointelegraph that many governments still view crypto as a “big threat to their country’s macroeconomics and main financial/payment landscape,” and for that reason, these countries regularly issue warnings about cryptocurrencies, introduce legislation to tax crypto transactions, and sometimes even ban crypto trading. Roy offered China as a case in point: It banned cryptocurrencies while at the same time “carrying out the world’s biggest CBDC pilot testing with 261 million users.”

That said, Roy still sees stablecoin projects surviving and continuing to play an important part in the decentralized finance ecosystem — even with widespread CBDC adoption. Kocevski, for his part, didn’t think government-issued electronic money was an existential threat to crypto.

Related: DeFi attacks are on the rise — Will the industry be able to stem the tide?

Noll not only believes that CBDCs and cryptocurrencies can co-exist, but CBDCs could potentially “work to popularize and mainstream crypto in general.” As public and private sectors become more informed and comfortable with cryptocurrencies, “this should advance the entire industry,” he told Cointelegraph, adding:

“The downside for crypto is that CBDCs will work to crowd out private cryptocurrencies, especially stablecoins focused on retail payment areas. Cryptocurrencies will stay in niches in the payment system where they serve unique functions and provide specialized services.” 

Overall, much has happened on the CBDC front in recent years. While most advanced projects so far have been in non-Western economies like the Bahamas, Nigeria and China, interest in many Western economies like France and Canada seems to be picking up, all the more noteworthy because many already have advanced payment systems in place. As Noll said: 

“Just look at President Biden’s recent executive order, which is all about advancing a U.S. CBDC and is a far step from 2020 and 2021 speeches by Fed officials that questioned the need for any such thing.”

Welcome to Mars: I own everything, have total privacy and life has never been better

While people on Earth are still expecting decentralized tech mass adoption, for people on Mars decentralization is the only way to organize their, well, everything.

This is a parody of the article published by the World Economic Forum titled “Welcome to 2030. I Own Nothing, Have No Privacy And Life Has Never Been Better.”

Welcome to Mars. Welcome to my city, or should I say “our city” because I, like every other inhabitant, am a stakeholder in it. No, I don’t mean “shareholder,” as this isn’t a dystopian future run by private companies. My city on Mars has a decentralized governance structure just like the greater Mars. It is not a corporation nor is it a militarized state. It is a set of institutions governed directly by The People.

As a result of this system, we have police that spread peace instead of violence. We have financial systems that spread wealth instead of creating poverty. We have institutions that are open instead of closed and transparent instead of secret, all of which makes corruption practically impossible. Our institutions are bottom-up and people-powered instead of top-down and authoritarian.

This might seem odd to you, living in a world where you can’t afford a home, decent healthcare or quality education. Where a tiny number of people have incredible power leading to widespread corruption, even in supposedly “free and open” countries. This is because you live in a centralized world. You have two choices: centralized private corporations or centralized governments with a monopoly on violence. We, on the other hand, live in a decentralized city and in a decentralized world.

Related: Tales from 2050: A look into a world built on NFTs

Decentralized government

In our world, it makes perfect sense for everyone to say they own everything. Every product and service, at least all of the most important ones, is provided by a decentralized organization — an organization that no one person or group controls and that anyone can acquire a stake in. Especially important are the organizations, like those that provide public goods, that are required by the constitution to be governed by one-person-one-vote. Meaning that simply by residing within that organization’s territory, you receive an equal stake in that organization to everyone else.

We don’t simply have our basic needs met; we live in an abundant world thanks to technology far beyond what you have on Earth. This is because on Mars, all technology is open source, meaning that there is incredible competition to develop new and innovative solutions but also participation remains accessible to every single citizen. All of this is made possible thanks to an advanced financial operating system that emerged in 2022 that enabled people to profit from the creation of open-source software. That year, a piece of software (itself open source) was released that made a peer-to-peer (P2P) economic system with no barriers to entry available to everyone for free and quickly spread virally.

Related: Crypto as a ‘public good’ in the 22nd century

Fee-less smart contracts

The foundational element of this system was fee-less and upgradeable smart contracts. If you think about it, all of our interactions and exchanges are managed through contracts, whether they are written down, verbalized or implied. Even money itself is just a contract between the citizen and the State to provide a stable medium of exchange.

Earlier versions of these “blockchain networks” had been released, but they were often very energetically wasteful (which is not suitable for the Mars economy) and required people to pay fees for every little thing they did. Imagine that we wanted to allow citizens to cast their votes in popular elections on a blockchain so that we could eliminate voter fraud. Forcing citizens to pay to cast votes would erect unacceptable barriers to participation and forcing the government to shoulder that cost would only decrease the capital it has available to deliver valuable services to its citizens. Putting those issues aside, the more used this platform became, the more energy it would waste, and energy is a precious commodity on Mars.

Related: Space invaders: Launching crypto into orbit

This new platform, however, was entirely fee-less and highly efficient. Smart contracts that allowed people to cast votes, create different kinds of money and even share their thoughts publicly could all be created and used for free. Just as the fee-less nature of the internet had opened a creative space for an entirely new universe of products and services — even entirely new business models — the fee-less nature of this blockchain opened up a similar creative spaces for an infinite variety of new solutions, which is what has driven the technological revolution on Mars.

While SpaceX obviously triggered the initial growth phase of Mars by transporting its early inhabitants, it was this blockchain that enabled those inhabitants to establish an entirely new socio-economic system that led to an explosion of productivity while at the same time increasing personal freedom and privacy.

But see for yourself by hopping on the next Starship flight to Mars!

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Andrew Levine is the CEO of Koinos Group, a team of industry veterans accelerating decentralization through accessible blockchain technology. Their foundational product is Koinos, a free-to-use and infinitely upgradeable blockchain with universal language support.