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The sheer size and severity of this month’s collapse and de-linking of Luna’s algorithmic stablecoin TerraUSD (UST) and its underlying asset exposes the underappreciated vulnerability and volatility of many cryptoasset projects that still exist in the overall ecosystem.
This is a scary thought for crypto investors and enthusiasts, but for regulators, the failure of UST/Luna is a major indicator for greater oversight and understanding of the market. But most importantly, for regulators around the world, it was a huge call to action to prevent something like this from ever happening again.
In South Korea, financial regulators are doing just that. Both the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) are calling for an “urgent” inspection of crypto exchanges located in the country. The agencies are reportedly asking the exchanges to share data on their total transactions and investors with enhanced safeguards.
While investor protection remains a major concern for regulators around the world, there are often very real limits to what can be done in the private sector.
A spokesman for South Korea’s financial authorities told news source Yonhap: “Regarding the Moon incident, we are monitoring the overall situation, but there is no direct action the government can take at this time. There is no basis for the government to intervene, as the private sector is free to conduct coin transactions.”
Congressional Research Service meets to discuss UST
Speaking of UST and LUNA, in the United States last week, the Congressional Research Service (CRS) – a legislative agency that supports the work of Congress – met to discuss a recent publication entitled Algorithmic Stablecoins and the TerraUSD Crash. This publication details what an algorithmic stablecoin is, what happened to UST, and the policy issues surrounding the risk of “derivation”. Several policy proposals covering the regulation of stablecoins are also discussed.
Similar to Treasury Secretary Janet Yellen’s speech earlier this month, the CRS once again draws a line between fiat-backed and algorithmically-backed stablecoins—a distinction that has major implications for overall volatility and market risks.
The CRS report also states: “The sudden drop in UST prices reflects a classic ‘kick-off’ scenario, where large numbers of investors withdraw their investments simultaneously – causing negative feedback loops and contagion effects. Some argue that stablecoins could be subject to prosecution if coin holders doubt the reserve funds that cover face value.”
It added: “Boost-like behavior has already occurred for algorithmic stablecoins during relatively quiet market conditions. In contrast, it is generally expected that vulnerabilities such as this may cascade and become more impactful during a broader market problem.”
Importantly, it points to the fact that this isn’t the first time something like this has happened with an algorithmic stablecoin – referring to the 2021 TITAN token that showed similar “running”-like behavior.
While reactive policymaking is never preferred over proactive policymaking, fortunately there are already several proposals from members of Congress that offer various solutions to vulnerabilities and protections for stablecoins.
Nigeria’s SEC confirms that all digital assets are securities in new regulatory regulations
The Securities and Exchange Commission (SEC) of Nigeria has officially clarified that all crypto-assets should be classified as securities and therefore fall under the purview of the SEC. This decision stems from its recent publication entitled “New Rules on Issuing, Offering Platforms and Safeguarding Digital Assets”.
In the 54-page report, the Nigerian SEC covers topics such as “Regulations on Issuance of Digital Assets as Securities, Rules on Registration Requirements for Digital Asset Offering Platforms (DAOPs), Rules on Registration Requirements for Digital Asset Custodians (DACs) , Virtual Asset Service Provider (VASP) Rules and Digital Asset Exchange (DAX) Rules.”
The report details the filing requirements that will include disclosure of material information, asset protection and fiduciary responsibilities for all custodians of cryptoassets. This includes risk mitigation standards, submissions and more.
In terms of compliance with anti-money laundering (AML) and know-your-customer (KYC) protocols, custodians are required to “establish and maintain written policies and procedures to:
- Ensure clear lines of reporting, authority and proper segregation of duties.
- Prevent unauthorized access or fraudulent transactions.
- Implement anti-corruption and whistle-blowing measures that are appropriate to the nature, scope and complexity of its business.
- Provide the client with full disclosure of all transactions and client assets.
- Ensure compliance with all relevant laws, regulations and guidelines, including, but not limited to, Anti-Money Laundering/Counter-Terrorism/Proliferation Financing (AML/CFT/PF) laws and regulations.”
Specifically, there is specific language in a document released by the SEC regarding valuable consumer and investor protections that states that all fees be fair, reasonable and transparent, that disclosures are not misleading, that ongoing education programs are mandated, that are stronger measures to avoid conflicts of interest, and more.
Often, global regulators will look to each other for inspiration or information regarding their regulatory oversight decisions. It will be interesting to see if other regulatory bodies take notes from the Nigerian SEC as they begin to form or reform their own securities rulings related to cryptoassets.
America’s Regulatory Compliance
