WASHINGTON — It’s been a brutal few weeks for the crypto market.

A quarter of a trillion was lost to the sector’s total market value when the terraUSD stablecoin, which is based on the U.S. dollar, collapsed practically overnight.

Digital coins, such as etherAs the market continues to suffer, the price charts continue to get hammered.

Some investors consider the past month to be a “successful” month. Bear Stearns momentFor crypto, you can compare the contagious effect of a failing stablecoin project with the collapse of a Wall Street bank which ultimately predicted the 2008 financial crisis and mortgage debt.

Michael Hsu is acting Comptroller and Currency of the U.S Treasury Department.

“Clearly you observed contagion from not only terra, but the wider crypto ecosystem as well as tether to other stablecoins. This is something we didn’t assume. That’s why I believe people should really be paying attention.

However, officials at the government don’t appear to be concerned about crypto crashes affecting other economies.

CNBC was able to speak with several regulators and senators at the DC Blockchain Summit. They said that while the spillover effect is contained and crypto investors shouldn’t panic. U.S. regulation has been the key to cryptocurrency success, and, most importantly, it is not going away.

Sen. Cory Booker D-NJ stated, “There must be rules that make this game more predictable, transparent and provide consumer protections.”

“We don’t want to choke off a new sector or innovation so that opportunities are lost. As I am seeing, many of these jobs and opportunities move overseas, which means that we are missing out on the job growth and economic expansion. Booker continued, “This is a very important space if the regulation is right. That can really be beneficial to the industry and protect consumers.”

In early May, a popular stablecoin known as terraUSD, or UST, plummeted in value, in what some have described as a “bank run,” as investors rushed to pull out their money. They were at their peak. luna and UST had a combined market value of almost $60 billion. Now, they’re essentially worthless.

Stablecoins, a form of cryptocurrency, are tied to the value of real-world assets like the U.S. Dollar. UST, also known as “algorithmic stablecoin”, is a particular breed. UST was not like USDC, a popular stablecoin that is dollar-pegged and has fiat reserves to back its tokens. Instead, UST used computer code to stabilize itself.

UST stabilized prices at close to $1 by linking it to a sister token called luna through computer code running on the blockchain — essentially, investors could “destroy” one coin to help stabilize the price of the other. Terraform Labs issued both coins. Developers used the system’s underlying technology to develop other apps, such as NFTs or decentralized finance apps.

Investors fled both the luna tokens and their prices crashed when they became unstable.

Some crypto insiders weren’t surprised by UST’s failure.

CNBC’s Nic Carter, Coin Metrics’ Nic Carter, says that no algorithmic stablecoin ever has succeeded. He also points out that the problem with UST is that it relied heavily on faith in its issuer.

Senator Cynthia Lummis (R-Wyo.), who is one of the most progressive legislators on Capitol Hill in crypto matters, agreed with Carter.

There are two types of stablecoins. Lummis explained to CNBC that the one that didn’t work was an algorithmic stabilitycoin. This is very different than an asset-backed stabilizecoin. She stated she wanted consumers to see that all stablecoins do not work the same and that it is important that they choose an asset-backed stabilitycoin.

This sentiment was also echoed in the International Monetary Fund managing director at the World Economic Forum’s annual meeting in Davos.

Kristalina Georgieva from the IMF said, “I beg you not pull out of how important this world is.” The IMF chief Kristalina Georgieva stated that it offers more inclusive services, lower costs and faster service. However, we must separate the apples and oranges.

Georgieva also stated that the assets needed to support stablecoins are not available. are a pyramid schemeIt was stressed that investors are responsible for ensuring protection from regulators.  

Hester Perce from Securities and Exchange Commission said, “I think regulation is going to happen quicker because of the recent events.” He also mentioned that stablecoin legislation was on the docket even before the fall UST.

The SEC Commissioner stated that “We must…preserve the ability for people to experiment using different models and do it in a manner that is within regulatory guardrails.”

The President’s Working Group on Financial Markets was formed months before the UST algorithmic stabilitycoin project collapsed. published a reportOutlining the regulatory framework for stablecoins. It divides the stablecoin ecosystem into two camps, trading stablecoins or payment stablecoins.

Stablecoins today are used to facilitate the trade of other digital assets. This report outlines best practices for stabilization of stablecoins in order to make them more popular as payment methods.

Hsu said that the report was co-authored by the Office of the Comptroller of the Currency.

This is an old story and prudential regulation is the best way to tackle it. It is because of this that I believe some of these options, such as those for regulatory approaches more reminiscent of banks, are good places to start.

Pham says that the key question regulators and legislators need to answer is whether stablecoins (including subsets of algorithmic unstablecoins) are actually derivatives.

A derivative can be described as a financial instrument that lets people trade the fluctuations in the price of an underlying assets. The underlying asset can be almost anything, including commodities such as gold or — according to the way the SEC is currently thinking — a cryptocurrency such as bitcoin.

Pham says that while the SEC regulates securities and everything else, it is likely that the CFTC has some regulatory control over anything not considered a security.

Pham stated that while we have regulation for derivatives based upon commodities, we have specific areas where we regulate spot markets.

“The last time we had … something blow up like this in the financial crisis — risky, opaque, complex financial products — Congress came up with a solution for that, and that was with Dodd-Frank,” continued Pham, referring to the Wall Street Reform and Consumer Protection Act, passed in 2010 in response to the Great Recession. It included tighter regulations for derivatives as well as new restrictions on trading by FDIC-insured institutions.  

Pham stated that some trading stablecoins can be considered derivatives. The dealer must manage any risk involved with the custom basket swap.