Cryptocurrency Meltdown Is a Wake-Up Call for Many, Including Congress

A digital currency called TerraUSD collapsed last month, wiping out an estimated $40 billion that investors had put into it. The crash happened in just a few days and left many people with no money and no way to get it back. The event shocked both everyday investors and experienced crypto experts, and it is now pushing the U.S. government to take action on cryptocurrency for the first time.

Cryptocurrencies are digital forms of money that exist only online. TerraUSD was a type of cryptocurrency called a stablecoin, which is supposed to keep a steady value — usually equal to one U.S. dollar. Unlike most stablecoins, TerraUSD was not backed by real money or hard assets. Instead, its creator, Do Kwon, promised that a computer algorithm — a set of automatic rules — would keep its value stable. That promise turned out to be wrong.

When a massive wave of selling hit TerraUSD, the algorithm could not hold its value. The coin's price crashed almost to zero in just a few days. Online message boards dedicated to Terra were soon filled with posts from desperate investors, some of whom shared very dark feelings about losing everything. The event made clear that even 'stable' digital coins can be very risky.

Not everyone who lost money was a beginner. Billionaire Mike Novogratz had been a big supporter of Terra and even got a tattoo of the word 'Luna' — the name of Terra's partner coin — on his arm. After the collapse, Novogratz told his followers that the tattoo 'will be a constant reminder that venture investing requires humility.' Even experts with years of experience were caught off guard by how fast things fell apart.

One investor, Michael Estrabillo, said he trusted a company called Stablegains with his money. The company told him his funds were being kept in a safer stablecoin called USD Coin. Then, on May 9, he learned his money had actually been placed in Terra. 'Had I known I was involved in a currency that was backed by an algorithm, I would have never invested in that,' Estrabillo said.

Cryptocurrency has grown from a niche internet topic into a huge part of everyday life. About 40 million Americans — roughly 16% of all adults — have invested in some form of crypto. The total value of all crypto assets once reached $2.8 trillion last November, though it has since dropped to below $1.3 trillion. Crypto ads ran during the Super Bowl, sports arenas have been named after crypto companies, and even the Washington Nationals baseball team had a sponsorship deal with Terra before it collapsed.

For a long time, the U.S. government mostly stayed out of the cryptocurrency world. But Terra's collapse seems to have changed that. Two U.S. senators — Democrat Kirsten Gillibrand of New York and Republican Cynthia Lummis of Wyoming — introduced a bill that would create rules for the crypto industry. The plan would give a government agency called the Commodity Futures Trading Commission the power to oversee cryptocurrencies like bitcoin and would regulate stablecoins for the first time.

Treasury Secretary Janet Yellen has also called for new rules around stablecoins. 'We really need a regulatory framework to guard against the risks,' she said at a House committee meeting in May. The Biden administration had already asked Congress in November to pass stablecoin laws, saying issuers should be required to hold enough real cash to back their coins — similar to how banks work.

Senator Pat Toomey of Pennsylvania is working on a separate bill. It would require stablecoin companies to get a license to operate, limit what kinds of assets they can use to back their coins, and be checked regularly to make sure they follow the rules. Toomey called Terra's crash a 'debacle' and said it made building guardrails around stablecoins even more important. 'There's nothing politically polarizing about creating a statutory regime for stablecoins,' Toomey said.

Surprisingly, even many people in the crypto industry support new rules. Perianne Boring, who leads one of the biggest crypto lobbying groups, said, 'I do think this is a bit of a wake-up call. A lot of people were taken aback by Terra's failure.' Other crypto groups have also announced support for the new legislation. This is a big shift for an industry that once prided itself on operating free from government control.

After Terra's fall, two major stablecoins remain: USD Coin, issued by a company called Circle, and Tether, created by a Hong Kong-based company called Bitfinex. Both are backed by real assets, though Tether is less open about exactly what it holds. Jeremy Allaire, the CEO of Circle, made clear that action cannot wait. 'It's not just urgent that Washington step in, it's urgently urgent,' he said.