A draft bill that has been part of widely-reported negotiations between democratic chair Maxine Waters of California and ranking member Patrick McHenry, a republican from North Carolina, of the House Financial Services Committee with the U.S. Department of the Treasury appear to be making an attempt to get the bill passed before the end of this year. At least two Washington insiders have noted this is extremely late in the year to be successful with passing new legislation; however, both Waters and McHenry appear set to send the bill for a markup sometime next week before its considered by the entire House of Representatives for a vote.
Amid the fallout in the crypto markets earlier this year from the more prominent so-called stablecoins, as some regulators refer to them, the latest draft includes a moratorium on endogenously collateralized stablecoins (ECS). This is a new concept and is not a known abbreviation; however, for ease of explanation, this story will use to to explain how it is a financial instrument similar in nature to a credit default swap (CDS,) in that a newly derived product in finance can result in systemic risks to a financial ecosystem.
Representative Maxine Waters, a Democrat from California and chair of the House Financial Services … [+]
An ECS is currently defined in the draft as a stablecoin “in which its originator has represented will be converted, redeemed, or repurchased for a fixed amount of monetary value and that relies solely on the value of another digital asset created or maintained by the same originator to maintain the fixed price.” This new definition of an ECS points directly at the invention of Terra Luna by Do Kwon, where the Terra (UST) stablecoin was supported by a token called Luna (LUNA). If UST ever fell below the value of a dollar, a person could convert UST to LUNA at a 1:1 ratio and in the process, this would help UST regain its peg against the U.S. dollar.
The resulting failure of the Terra ECS created a systemic impact that drove the $3 trillion market cap for crypto down to less to $1 trillion today. While much smaller than today’s $100 trillion global capital markets that looked to be in jeopardy after the global financial crisis, the idea of a financial instrument representing the U.S. dollar that suddenly could not be redeemed at a 1:1 ratio is not new. According to a report from Moodys in 2010, 36 of 100 U.S. prime money-market mutual funds had to be propped up in order to survive the financial crisis or they would have “broken the buck,” a term describing when a financial instrument fails to be redeemable for the equivalent of one dollar.
Many U.S. regulators who are currently in leadership roles such as Michael Hsu, Acting Comptroller of the Currency at the Office of the Comptroller of the Currency (OCC), have experienced the financial crisis first-hand and often see similar patterns in the nascent crypto marketplace. Just as the notion of breaking the buck is not new this time around in the first crypto crisis, neither is the desire for U.S. lawmakers to come in afterwards with legislation to help restore order and avoid a similar crisis in the future.
Michael Hsu, acting director of the Office of the Comptroller of the Currency, speaks during the DC … [+]
Thus, as regular payment stablecoins backed by U.S. dollars appear headed for regulations via the legal construct of the latest draft, lawmakers seem ready to put Terra and other ECS in timeout for a two-year period. The draft discussion bill has been largely under wraps until the latest news headlines have broken with details of the bill. This notion of a moratorium may face resistance from some who argue that crypto is code, code is speech and speech is protected under the First Amendment of the Constitution. Similarly, the sanctioning of Tornado Cash by the Office of Foreign Assets Control (OFAC) came under scrutiny as CoinCenter, a leading non-profit focused on cryptocurrency policy in D.C., argued the agency exceeded its legal authority by sanctioning a smart contract on the Ethereum blockchain.
Meanwhile, Do Kwon’s whereabouts are unknown, and the stakes appear high as a court in South Korea issued a warrant for his arrest and just yesterday, asked Interpol to issue a red notice as they believed he was clearly on the run. Meanwhile, Do Kwon has publicly stated he is not on the run but rather cooperating with authorities.