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Crypto crash leaves Brussels split on response

Crypto markets have crashed — but legislators are divided on how to react.

A devastating snap of “cryptowinter” has wiped out $400 billion of market value in just four days, leaving many investors out of pocket — especially those who decided to ride the crypto bull market last fall. Bitcoin’s value is currently trading at around €30,000 per coin, more than half what people would have paid in mid-November.

And now, crypto bigwigs are going online to tweet musings and remind folks about the big picture as investors lick their wounds.

“If this is your first cryptowinter, then welcome,” Charles Hoskinson, who helped set up the Ethereum and Cardano crypto platforms, tweeted Thursday. “Been through many since 2011 and they always hit like a cold ice bath. We are in the panicked blood in the street phase. It clears in weeks to months as a bottom is found. Then a long climb up the ladder.”

But many legislators on both sides of the Atlantic are in no mood for a philosophical debate over a market that has been in decline since November, as rate hikes leave investors second-guessing their riskiest assets. Those investors that lost the most money were most likely from the younger generation, according to Teunis Brosen, head economist for digital finance and regulation for the Dutch lender ING. 

“They are reacting more in a panic than a more experienced investor might do,” he said.

Some legislators in Europe are demanding stricter rules in a bill that aims to regulate and supervise so-called stablecoins — digital assets that crypto investors use as a safe haven and a way to move funds around. These took a serious knock during the crash.

Industry leaders in the U.S. fear that the fallout will provide ammunition for powerful skeptics like Senator Elizabeth Warren and Securities and Exchange Commission Chair Gary Gensler to crack down on industry. Others are calling for calm.

“We have to be careful and cautious when we draft the regulation,” Czech liberal Ondřej Kovařík of the Renew Europe group said, referencing the EU’s market in crypto assets bill, dubbed MiCA, which could be in place by the end of 2023.

Parliament is meeting with EU governments in the Council Wednesday evening for so-called trilogue talks to negotiate a final legal text. Kovařík is confident the investor safeguards in MiCA should be enough. “We cannot address shifts in markets or market trends,” he said. “We don’t do that in other financial regulation, either.”

Spanish Green MEP Ernest Urtasun, by contrast, wants more. MiCA would only apply to newly issued crypto assets in Europe in its current draft — and that must change to include all issuances.

“The crypto market is now larger than the sub-prime mortgage market was when it triggered the global financial crisis,” he said in a written statement. “We expect a similar sense of urgency that we have seen in recent statements by top [European Central Bank] executives calling for an end of the de-regulated crypto Wild West.”

Not so stable

Stablecoins are supposed to be a safe place for crypto investors to park their funds in between riskier bets. These tokens are tied to a national currency or a reserve of financial products that are easily sold to keep a steady price and redeem investors who want to cash out. Many stablecoins, such as Tether and USD Coin, are pegged to the U.S. dollar, so investors can sell a token for $1.

The promise proved empty in spectacular fashion this week for TerraUSD, which is different than other stablecoins because it’s “algorithmic.” In other words, TerraUSD relies on financial engineering to keep the link to the greenback.

That engineering proved faulty and the stablecoin “broke the buck” after a massive sell-off, leaving its price wavering around the 35 cent-mark Thursday. Before the peg was broken, the stablecoin was the third largest, with a market value of $18 billion. The panic also hit Tether, the largest stablecoin around, sending its value down to 95 cents. But it has since retained its dollar benchmark.

Confidence needs to be restored through MiCA with strict rules around reserves, redemption rights, anti-money laundering and supervision, Finland’s S&D member Eero Heinäluoma tweeted.

Not everyone is so panicked. German conservative Stefan Berger of the European People’s Party believes legislators should be careful about kneejerk reactions.

TerraUSD’s collapse was a wake-up call. But “this is not to say that all stablecoins are problematic,” said Berger, who shepherded MiCA through Parliament. “Legislators should take a closer look at their design in the future before authorizing them. MiCA is an important step here.”

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