The crypto space has been gaining more and more attention recently. As per usual, government officials are highlighting the possible ways the new ascent class is harmful to retail investors and why the sector needs regulation.
The collapse of the Terra ecosystem, now called Terra Classic, provided critics with fresh ammunition. Of course, crypto detractors won’t let it go to waste. They will repeat it on what seems like an infinite loop.
At the Swiss National Bank (SNB)-Community Investment Fund (CIF) Conference on Cryptoassets and Financial Innovation, U.S. Federal Reserve (FED) Governor Christopher Waller talked about the “main issue” in regulating this asset class.
Waller acknowledged that by “any measure”, the industry has experienced “incredible growth” in the last five years. Digital assets have expanded their narratives from a “means of payment” to a complete alternative to the current financial system.
The FED Governor said “innovation is happening fast” within this sector. This created a gap between the nascent asset class and traditional rules and regulations. Waller said:
In that environment, the normal backstops and safety nets of traditional finance do not necessarily or reliably apply. High volatility is the rule, not the exception; fraud and theft occur regularly, often at large scale. Your whole pot is always on the table (…).
Savvy traders and investors, the FED Governor continued, are able to mitigate or navigate through the risks. They can thrive and often argue that all markets have associated risks. Therefore, they reject the implementation of regulations, or find them “counterproductive”, according to Waller.
However, the FED Governor claims rules are implemented to protect retail investors. A survey conducted by the FED claims that 12% of adults in the U.S. bought and held cryptocurrency in the past year.
90% of those investors claimed they bought cryptocurrency for “investment purposes”. These results are conservative, Waller said, but reflect the popularity obtained by this industry and the potential danger for retail investors.
Crypto Losses Are “Morally” Intolerable?
When retail investors, people with little experience in smart contracts, crypto trading, or DeFi platforms, lose money, it can affect the individual and society alike, according to the FED Governor. In that case, he argued, it becomes a social responsibility for society to prevent them from making this mistake again.
At this point, the FED Governor said, the outcome becomes “practically, politically, or morally intolerable” and must be stopped from spreading and causing a shock to the system. Waller used the collapse in the Terra ecosystem to defend his argument:
We saw it just a few weeks ago after what can only be described as a run on the Terra ecosystem, when everyday users were seeking restitution and even experienced DeFi players were discussing ways to compensate retail investors. This leads us to the main reason, in my view, that society wants to regulate new and poorly understood markets for financial products.
Regulation and control become a public need, Waller said. He claims despite the innovation and potential for digital assets, especially stablecoins, “you can’t program confidence”.
However, the FED Governor failed to point out the losses suffered by retail investors in traditional financial markets, or the fact that crypto has been asking for a clear legal framework to operate in the United States. Rather than solutions, the sector has been dismissed or simply treated as a borderline criminal.
On the losses experienced by retail investors, as traditional companies trend downside on the S&P 500 and Nasdaq 100 Index, the U.S. Federal Reserve has its fair share of responsibility.
FED knew how this was going to unfold and that it was going to be HARSH! Otherwise no reason to play 'conflict of interest' card at top.
So, this means they have a plan and should not overreact.
BUT Biden is panicking and asking FED to be more aggressive. pic.twitter.com/NYsacrGccm
— Material Scientist (@Mtrl_Scientist) June 4, 2022
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At the time of writing, BTC’s price trades at $29,800 with a 1% profit in the last 24-hours.