Regulation Will Not Save You: on Shorts & the Aftermath of Terra
Along with Financial Services and Markets Bill (U.K.), Economic Crime and Corporate Transparency Bill (U.K.), Utah's Task Force, and Shanghai says, "Bitcoin is a Virtual Asset"
Twali Wrapped is a community-driven initiative tracking the most important developments of the past week for policy, regulation, compliance, and legalities, related to web3.
In addition, we speak with experts toiling with how best to implement regulation and policy changes, while prioritizing simplicity in communication to ensure our reader’s complete understanding of the implication of such developments.
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The Docket
by Lucy Pappas
Welcome to the Docket - A Bulletin Board of the most important legislation either proposed, or passed, in the past week.
Proposed: the Queen and Crypto
This week marked the commencement of the State Opening of Parliament in the U.K. From the Queen’s Speech, two crypto bills were introduced that the British Parliament will see in the following months.
Financial Services and Markets Bill (page 55): legislation to support innovation in financial services technologies, such as the adoption of cryptocurrencies.
Economic Crime and Corporate Transparency Bill (page 81), which would create “powers to more quickly and easily seize and recover crypto assets” from criminal parties using crypto assets in criminal activities.
Key Takeaways. With the start of the parliamentary year, there appear to be two hard lines on crypto legislation in the UK:
Supporting technological advancement for the sake of financial services.
Defending against criminal activity via crypto assets.
Going forward, tracking the attention and traction of these laws may provide insight into the future of crypto and DeFi landscape in the UK.
Passed: Utah’s Blockchain and Digital Innovation Task Force
In Utah this past week, House Bill 335—Blockchain and Digital Innovation Task Force— passed into effect, sponsored by Rep. Teuscher (R) and Sen. Cullimore (R).
The Task Force will consist of:
1 Utah State Senator
1 House Representative
6 members with experience in blockchain and digital innovation technology
Up to 7 additional members.
Their mission? To develop knowledge and expertise on financial technology, cryptocurrencies, blockchain, and digital innovation technology to better inform policy recommendations on related adoption, regulation, and development.
Key Takeaways. Increasing policymakers’ understanding of crypto, DeFi, and blockchain technology is a rudimentary part of designing and implementing legal guidelines that don’t smother innovation and growth in the web3 space.
While Utah’s legislative efforts to increase policymaker understanding pan out is yet to be seen, the intention to learn and understand first does mark this state as a welcoming environment for web3 innovation.
Ruled: Shanghai court says Bitcoin is a “Virtual Asset”
This past week, Shanghai High Court ruled Bitcoin as a “virtual asset” — which determines BTC as an asset of value. In 2020, the plaintiff requested the defendant to return 1 BTC to them. Two years later, the ruling states that Bitcoin is subject to legal protections, based on the assumptions that it possesses value, is scare, and is allocatable.
Key takeaways. While no policy will likely follow this case, the legal precedence set in one of China’s largest economic hubs is an important signal in a country where Bitcoin mining and transactions have been banned. Bitcoin mining and transactions may still be banned in China, but web3 remains an important player between the blockchain technologies that support public and private financial infrastructures and steady popularization of NFT marketplaces.
The Regulations Will Not Save You
Plenty of ink has been spilled regarding the downfall of Terra and Luna. The resulting market crash launched predictions of a protracted bear market for the crypto sector, plus plenty of “I-told-you-sos” from algorithmic stablecoin skeptics. But in the immediate aftermath, little has changed from a policy perspective.
Sablecoin legislation continues to brew in Congress. Policy proposals include the Stabelcoin Classification and Regulation Act from U.S. Representative Rashida Tlaib (D-MI) and the Stablecoin Innovation and Protection Act from U.S. Representative Josh Gottheimer (D-NJ). However, most of the policy focus to-date has centered on stablecoins backed 1:1 by fiat currency and reserves.
Rep. Gotthmeimer’s proposal does leave room for an expansion of regulation into algorithmic stablecoins. Nonetheless, despite the Terra-Luna drama, it is highly unlikely Congress would act on the stablecoin issue exclusively. DC is awash with rumors about a broader crypto policy package under development by House Financial Services Chairwoman Maxine Waters (D-CA). Meanwhile, Republican lawmakers have released previews of their own crypto approach. Whether any substantive initiatives materialize before the midterm elections in November is anybody’s guess.
All of this comes as little solace to the many crypto investors who watched the value of their holdings dwindle overnight. Crypto Twitter included expert analysis of the mechanics of the Luna/Terra downfall. There was also vigorous debate about how to view the entire episode; did we witness a brilliant trade, a coordinated attack, or both?
Unfortunately, regardless of your perspective, we are likely to see more instances of catastrophic losses on the long, windy road to broader crypto adoption. Traders (and hackers) will always be looking for attack vectors that facilitate windfall profits – and crypto markets will continue to be prime targets as the industry matures. But if the traditional financial world is any guide, a regulatory framework will not be a panacea.
Consider the history of public stock markets. Today the practice of “short selling” is commonplace, but it only became legal when Congress passed the Securities and Exchange Act in 1937. At that time, market participants were only allowed to execute short-sell trades in limited circumstances. The rules were liberalized in 2007, helping launch the short selling frenzy we know today.
The bounds of acceptable behavior in financial markets often shift based on social norms, regulatory capacity, and political will. For a system as radically different as DeFi, where regulation begins is not likely to be where it ends up.
On a personal level, that means practicing sound risk management and asset security will always be imperative. For regulators, it means that as the DeFi sector evolves, a light touch is a wiser policy choice than draconian action. Of course, consumer protection remains important, but policymakers must recognize the perennial “cat-and-mouse” nature of financial regulation. Cracking down too hard in one area may only open up new opportunities for exploitation and regulatory arbitrage.