Deliberations on a bill that was part of much-reported negotiations between Chairwoman Maxine Waters (D-CA) and Senior Member McHenry (R-NC) of the House Financial Services Committee with the US Treasury Department appear to be playing a role in trying to change that pass legislation before the end of this year. At least two Washington insiders have noted that this is extremely late in the year to be successful in passing new legislation; However, both Waters and McHenry appear ready to send the bill for a surcharge sometime next week before it is scrutinized by the full House of Representatives for a vote.
Amid the impact on crypto markets earlier this year from the more well-known “so-called” stablecoins, as some regulators call them, the latest draft includes a moratorium on “endogenously collateralized stablecoins.”‘ (ECS). This is a new concept and not a familiar acronym; however, to simplify the explanation in this story and to show that it is a financial instrument similar to a Credit Default Swap (CDS) as a newly derived financial product can create systemic risk for a financial ecosystem.
An ECS is currently defined in the draft as a stablecoin “…in which its originator has exchanged, redeemed, or repurchased at a fixed monetary value and which 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 to Do Kwon’s invention of Terra Luna, where the stablecoin Terra (UST) was backed by a token called Luna (LUNA). Should UST ever fall below the value of a dollar, a person could convert UST into LUNA at a 1:1 ratio, and in doing so would help UST regain its peg to the US dollar.
The resulting failure of the Terra ECS had a systemic impact that dropped the crypto market cap from $3 trillion to less than $1 trillion today. Although much smaller than today’s $100 trillion global capital markets, which seemed threatened after the Global Financial Crisis (GFC), the idea of a financial instrument representing the US dollar and suddenly being out of 1 :1 can be repaid, not new . According to a 2010 Moody’s report, 36 out of 100 top-rated U.S. money market mutual funds needed to be bailed out to survive the financial crisis or they would have “broke the buck,” a term used to describe when a financial instrument fails redeemable for the equivalent of one dollar.
Many U.S. regulators currently holding senior positions, such as Michael Hsu, Acting Comptroller in the Office of the Comptroller of the Currency (OCC), have experienced the GFC firsthand and often see similar patterns in the nascent crypto market. Just as the idea of breaking the buck is not new this time around in the first “crypto crisis”, neither is it the desire of US lawmakers to step in with legislation afterwards to help restore order and a similar crisis in to avoid in the future.
As regular “payment stablecoins” backed by US dollars head for regulation via the latest draft legal construct, lawmakers appear poised to put Terra and other ECS on “hiatus” for a two-year period offset. The draft discussion law was largely kept under wraps until the latest headlines emerged detailing the bill. This notion of a moratorium may face opposition from some, who argue that crypto is code, code is speech, and speech is protected by the First Amendment. Similarly, the Office of Foreign Assets Control (OFAC) sanctioning of “Tornado Cash” has come under scrutiny as CoinCenter, a leading cryptocurrency policy-focused nonprofit in DC, argued the agency exceeded its legal authority to by approving a smart contract on the Ethereum blockchain.
Meanwhile, Do Kwon’s whereabouts are unknown and the stakes appear to be high as a court in South Korea issued an arrest warrant for him and only yesterday asked Interpol to issue a “red charge” as they believed he was clear on the run. Meanwhile, Do Kwon has publicly stated that he is not on the run but is cooperating with the authorities.