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Regulators see possible silver lining to crypto winter: ‘This is not necessarily bad’

June 27, 2022, 5:19 PM UTC
Jon Cunliffe
Bank of England deputy governor Jon Cunliffe.
Getty Images

Crypto executives and regulators don’t often see eye to eye, but they seem to agree that the recent crypto market turmoil could prove to be positive for the industry by helping filter out unsustainable projects and bad actors.

At least that was the prevailing consensus at the inaugural Point Zero Forum, an invite-only meeting of investors and policymakers that took place in Zurich last week.

Crypto’s total market capitalization is about $1 trillion, down from an October high of $2.7 trillion, according to CoinGecko data.

“There’s a bloodbath going on,” Ravi Menon, managing director of the Monetary Authority of Singapore, said at a panel on the future of financial services on Wednesday, referring to the billions of dollars—and companies—leaving the market.

The collapse of the once $18 billion algorithmic stablecoin terraUSD (UST) in May sent shock waves through the industry. Since then, hedge fund Three Arrows Capital revealed it had suffered heavy losses while multibillion-dollar crypto lender Celsius Network froze withdrawals.

Prominent crypto firms around the world from U.S.-based Coinbase and Gemini, to Europe’s Bitpanda have slashed hiring.

Menon says the exodus could help weed out bad actors.

“This is not necessarily bad,” Menon said. “As a regulator, a central bank, it’s a great opportunity to separate the wheat from the chaff.”

Also on the panel, Jon Cunliffe, a deputy governor at the Bank of England, likened the market crash to the dot com bubble, where excessive speculation led to U.S. tech stock valuations ballooning in the 1990s before the bubble burst in 2000.

“A lot of companies went, but the technology didn’t go away, and it came back 10 years later,” Cunliffe said, pointing to survivors such as Amazon. “So whatever happens over the next few months to crypto assets that people trade, I expect crypto technology and finance to continue.”

Fast-tracking regulations

The recent market meltdown underlines the growing urgency for establishing regulations for the industry.

On June 7, U.S. Sens. Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.) introduced a wide-ranging bill that would govern crypto asset service providers and includes detailed disclosure requirements for stablecoin issuers in light of Terra’s downfall.

The European Union’s Markets in Crypto Assets (MiCA) bill, which also lays out requirements for stablecoin issuers, is moving ahead in the legislative process and the U.K. announced in April that it was planning to introduce a regulatory package for crypto and to regulate stablecoins under existing payments legislation.

Crypto firms and regulators need to put the effort in to make the industry more sustainable, Agustín Carstens, general manager of the Bank for International Settlements, a central bank-owned financial institution, said during the conference in Zurich.

“The degree of leverage in many of these transactions is completely abnormal,” Carstens said during a panel on the future of financial services. “You cannot defy gravity. You are running an extremely risky operation. If something goes a little bit wrong, the possibility of crashing is very high.”

‘I welcome this downturn’

Several crypto heavyweights in attendance said the market crash was a welcome correction.

“I welcome this downturn,” Kris Marszalek, CEO of digital assets exchange Crypto.com, said during a panel on the future of crypto. “This is the time to demonstrate how the real [companies in crypto] can continue building [and] be the steady hand, the calming voice, during volatile times and just deliver real value.”

Brad Garlinghouse, CEO of fintech Ripple Labs, said that the downturn could weed out tokens that have no utility.

“I think the vast majority of tokens will go away over a period of time, because I can’t figure out the utility … Dogecoin is a clear example of [something that was] never designed with utility, the founders have left the project [and] it moves based upon the tweets of Elon Musk.”

During his panel, Changpeng Zhao, CEO of Binance, the world’s largest crypto exchange by volume, suggested that crypto entrepreneurs need to have a clear business model.

“If you’re only getting users because you’re using incentives to attract users, that’s not a real business model. Eventually you’re going to run out of money and you will crash,” Zhao said during a panel on Wednesday on weathering the storm and the next phase of growth.

The industry will take a long time to recover but “the worst part is probably over,” Zhao said.

Jack Schickler and Sandali Handagama contributed reporting.

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