Regulation will choke crypto innovation

“The very foundation of cryptocurrency is one that is antithetical to global regulation and the centralized financial system that regulators seek to uphold and protect.”

This year has witnessed a raft of new draft legislation aimed at the crypto industry. In the US, Congress negotiations have been underway since Biden’s March 9 executive order on responsible digital asset development, with a strong focus on USD-backed or pegged stablecoins.

One bill under discussion will require a 1-to-1 reserve backing for USD pegged stablecoin providers, while a second would force full disclosure of reserve assets by USD stablecoin providers. Now, a third bill is under discussion that would be extremely limiting for USD algorithmic stablecoins.

This legislation would reportedly see the US Securities and Exchange Commission (SEC) introduce a two-year ban on the creation or issuance of new algorithmic stablecoins, while the regulator gets to grips with what it sees as a dangerous threat to the global financial ecosystem.

This bill refers specifically to “endogenously” collateralized stablecoins: a term that refers to stablecoins whose value is secured by another digital asset created specifically for that purpose. In other words, this new ban applies to algorithmic stablecoins like UST — which infamously lost its 1:1 USD peg in early May, crashing to $0.006 within a little over a month. The now-defunct token took out $60 billion with it almost overnight and sparked a wider, $600 billion crypto crash.

Considering the devastating impact that the UST crash has had on investors globally, it’s unsurprising that global regulators are concerned. Indeed, the US is far from alone in its wish to regulate crypto. The EU is readying to publish its long-awaited Markets in Crypto Assets Regulation Act (MiCA), which will reportedly require crypto companies to register with the authorities, hold sufficient capital to back stablecoins, and offer clear information to new investors.

Centralized regulation is antithetical to crypto

Many in the industry are welcoming some or all of these regulations. However, we should be cautious. Governments around the world are clearly now recognizing the emergence of crypto, which is slowly becoming “too big to fail” - not least because institutional investors are increasingly entering the market. And of course, looking after the interests of institutional investors is among the top priorities of global regulators.

As most will know, Bitcoin was founded in 2009 as a direct result of the corruption that led to the global financial crisis (GFC) of 2008/09. The illegal and unethical lending practices of global banks led to a catastrophic financial downturn that robbed millions of people of their jobs, savings, homes, and more. It also led to enormous government bail-outs of these institutions and the beginning of loose monetary policies throughout the West that have led us, with the help of a global pandemic, directly into the inflationary spiral we face today.  

The founders of Bitcoin saw and predicted all of this and, in response, created a totally decentralized monetary system that could not be controlled or corrupted by any government, organization, or individual. They recognized the shortcomings of financial institutions - including the regulators that allowed the conditions of the GFC to arise - and sought a people-powered alternative. As such, the very foundation of cryptocurrency is one that is antithetical to global regulation and the centralized financial system that regulators seek to uphold and protect.

Self-regulation drives innovation  

This is not to say, however, that the industry should not be regulated. Lessons should and are being learned following the devastating crash of UST and the many tokens, hacks, and exploits that have come before and after it. But this is coming from the inside.

Unlike traditional finance, the crypto industry is still largely a community of builders interested solely in innovation and progress. Indeed, while the SEC proposes a 24-month ban simply so it can understand what an algorithmic stablecoin is, these builders have already moved on from UST.

Led by founders and investors like Sam Bankman-Fried, the industry has already implemented significant changes, with a focus on consolidating failed centralized platforms and bringing them back into the fold of decentralized finance - where crypto belongs. Meanwhile, innovators are building new kinds of “stable” tokens backed by assets more meaningful than fast depreciating fiat currency.

At Laguna Labs, we’ve been working on a “flatcoin” - a type of token that holds its purchasing power from the moment it’s bought, to the moment it’s sold. Our flatcoin - Nuon - is pegged to a basket of consumer goods and services that represent the rising cost of an average person’s standard of living - a far more accurate representation of value for the average person than $1.

Nuon holds its peg via a dynamically adjusting algorithm. Unlike UST, though, it is fully collateralized by exogenous tokens like BTC and ETH. Most importantly, though, Nuon is entirely decentralized. This is because, like the founders of Bitcoin, we believe that crypto should operate outside of the realm of traditional finance.

We and other innovators like us believe that crypto should offer real and viable alternatives for average people to transact, save and invest in a way that preserves, protects, and grows their wealth, privacy, and independence. This is the type of innovation that is essential in a thriving economy and which is at risk of being crushed by the blunt instrument of centralized regulation.