An occurrence that is contained

Early this month, the value of a popular stablecoin known as terraUSD, or UST, fell in what some have dubbed a "bank run," as investors hurried to withdraw their funds. Luna and UST had a combined market worth of about $60 billion at their peak. They're now almost useless.

Stablecoins are a sort of cryptocurrency that is linked to the price of a real-world asset, such as the US dollar. UST is a type of stablecoin called a "algorithmic" stablecoin. Unlike USDC (another prominent dollar-pegged stablecoin), which relies on computer code to maintain its value, UST relied on computer code to maintain its value.

UST kept its price near $1 by tying it to a sister token called luna via blockchain computer code — effectively, investors could "destroy" one currency to help keep the price of the other stable. Developers leveraged the underlying infrastructure to construct other applications such as NFTs and decentralized finance apps, and both currencies were produced by Terraform Labs.

Investors raced out of both tokens as the price of luna became shaky, sending values tumbling.

The demise of UST, while contagious, came as no surprise to some crypto specialists.

According to Nic Carter of Coin Metrics, no algorithmic stablecoin has ever succeeded, and the basic problem with UST was that it was mostly supported by confidence in the issuer.

Sen. Cynthia Lummis, R-Wyoming, agrees with Carter. She is one of the more progressive politicians on Capitol Hill when it comes to cryptocurrency.

"Stablecoins come in a variety of shapes and sizes. Lummis told CNBC that the one that collapsed was an algorithmic stablecoin, which is distinct from an asset-backed stablecoin. She expressed her hope that customers would recognize that not all stablecoins are created equal and that selecting an asset-backed stablecoin is critical.

At the World Economic Forum's annual gathering in Davos, the managing director of the International Monetary Fund reiterated that opinion.

"I implore you not to lose sight of the value of our planet," IMF Managing Director Kristalina Georgieva stated. "If we differentiate apples from oranges and bananas, it provides us all speedier service, far reduced prices, and greater inclusiveness."

Georgieva also stated that stablecoins that are not backed by assets are a pyramid scheme, and that it is on to authorities to put in place safety guardrails for investors.

"I think we're going to see regulation move faster because of the events of recent weeks," said Hester Peirce of the Securities and Exchange Commission, who also pointed out that stablecoin legislation was already on the table before UST's demise.

"We have to make sure to...preserve people's flexibility to experiment with diverse models while staying inside regulatory guardrails," the SEC Commissioner stated.

Anti-shadow banking legislation

The UST meltdown, according to Commodity Futures Trading Commission Commissioner Caroline Pham, demonstrates how much action regulators must take to prevent the return of shadow banking — a type of banking system in which financial activities are facilitated by unregulated intermediaries or under unregulated conditions.

Many existing measures, according to Pham, might suffice.

"It's always easier to set up a regulatory framework when one already exists," Pham explained. "You're just proposing that the regulatory perimeter surrounding newer, unique items be extended."

The President's Working Group on Financial Markets produced a paper establishing a regulatory framework for stablecoins months before the UST algorithmic stablecoin project collapsed. The organization separates the stablecoin landscape into two camps: trading and payment stablecoins.

Stablecoins are now being utilized to make trading of other digital assets easier. The goal of the paper is to lay out best practices for regulating stablecoins so that they may become more commonly accepted as a form of payment.

"Those of us who are bank regulators, we're kind of historians of money-like instruments," said Hsu, who co-authored the paper with the Office of the Comptroller of the Currency.

"This is an all-too-familiar narrative, and prudential regulation is the only way to deal with it." This is why I believe some of the possibilities, particularly the ideas for a more bank-like regulatory approach, are a solid starting point."

According to Pham, the most important question for regulators and politicians to answer is whether stablecoins, particularly the subset of algorithmic stablecoins, are derivatives.

A derivative is a financial product that enables investors to trade on the price changes of an underlying asset in general. The underlying asset may be nearly anything, including commodities like gold or cryptocurrencies like bitcoin, according to the SEC's current understanding.

The SEC controls securities, but the CFTC is likely to have some regulatory oversight over anything that isn't a security, according to Pham.

"We have commodity derivatives regulation, but we also have specific sectors... where we actively control spot markets," Pham explained.

"The last time something like this blew up in the financial crisis — risky, opaque, complex financial products — Congress came up with a solution for that, and that was Dodd-Frank," Pham continued, referring to the Wall Street Reform and Consumer Protection Act, which was passed in 2010 in response to the Great Recession. The measure includes tighter derivatives regulation as well as additional curbs on FDIC-insured banks' trading activities.

"If some of these trading stablecoins are derivatives, you're really talking about a bespoke basket swap, and the dealer is in charge of managing the risk associated with that," Pham stated.

Congress is the one who makes the decisions

In the end, according to SEC Commissioner Peirce, Congress decides how to proceed with crypto regulation. While Wall Street's top regulator is already working in accordance with its powers, Congress must divide enforcement duties.

Lummis has teamed up with Sen. Kirsten Gillibrand, D-N.Y., to draft a measure that lays out this regulatory divide.

Lummis told CNBC, "We're putting it on top of the present regulatory framework for assets, including the CFTC and the SEC." "We're making certain that capital gains, not ordinary income, are taxed." We've covered accounting methods and terminology, and now we're looking at consumer protection and privacy."

The law also addresses the regulation of stablecoins. According to Lummis, the measure anticipates the emergence of this subset of digital assets and mandates that they be either FDIC-insured or backed by more than 100 percent physical assets.

Booker claims that in the Senate, there is a group of "decent guys on both sides of the aisle" working together to get it right.

"I'd want to see the correct regulation," Booker concluded. "I don't believe the SEC is the appropriate venue for regulating much of this sector." Clearly, the bulk of cryptocurrencies, such as ethereum and bitcoin, are more commodity-like."

However, until a bill is passed by Congress, Pham advises crypto investors to exercise extreme caution.

"If people began thinking of some of these truly creative crypto tokens as lottery tickets, you may strike it rich and get rich rapidly, but you might not," Pham added.

"I guess what I'm concerned about is that without sufficient customer safeguards and disclosures in place, individuals are buying some of these crypto tokens in the hopes of striking it big," she added.

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I don't watch the price. I know it will always gain in value over the long term as more people are able to use it.

When it comes to Bitcoin's pricing, Jack Dorsey has a good idea of what to expect

An American journalist and non-fiction author, Tom Philpott, sent out a tweet that prompted a response from Jack. Philpott chastised Dorsey for tweeting about Kendrick Lamar, his new album, and his impending tour instead of watching and commenting on "Bitcoin is burning."

According to Dorsey, he wasn't paying attention to the Bitcoin price's demise. As far as he's concerned, he's confident that BTC will always recover. His belief is based on the fact that "more people are able to use" Bitcoin.

This month has been a rough one for the cryptocurrency industry as a whole. On May 4, the Federal Reserve raised interest rates by half a basis point for the first time in 22 years.

When Bitcoin fell from $39,000 to $31,000, it was due to a short-term surge. Terra's UST and LUNA coins were the second to fall, and no one expected it.

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UST was advertised to the general public as a stablecoin, a form of cryptocurrency whose value is expected to be constant over time, providing a useful hedge against the wild price volatility of other cryptocurrencies like bitcoin or ether. Most stablecoins rely on currency reserves (whoever produces a stablecoin tied to the dollar should potentially store an equivalent quantity of dollars in a vault somewhere) or other collateral, such as crypto. UST, on the other hand, is a "algorithmic stablecoin" with none of that. It is completely isolated from the outside world and proud of it.

UST has a symbiotic relationship with its satellite asset luna, which can be used to gain cryptocurrency rewards on Terra's own blockchain. It was always possible to exchange UST for luna and vice versa, and the blockchain's own logic ensured that terra always traded at a dollar per unit, but luna's price fluctuated according to market conditions.

This was designed to keep its price steady by using arbitragers' efforts to benefit from market inefficiencies. If a sell-off of UST on cryptocurrency exchanges threatened to drive its price below $1, clever arbitragers would rush to acquire UST and use them to buy luna at a discount on the local blockchain, so shoring up UST's price.

If the price of UST rose above $1 on crypto exchanges, consumers would use their lunas to purchase one-dollar-per-unit USTs on Terra's blockchain and resale them on other platforms, lowering the price of UST. It's an ingenious design. It's also one that hasn't and won't work. "It reminds me of perpetual motion machines." People were interested in learning how to obtain free energy. "They'd have pulleys, magnets, and levers," Muci said of the ideas. "It's a little bit the same notion with algorithmic stable currencies."

In a study devoted to algorithmic stablecoins titled "Built to Fail," Ryan Clements, an assistant professor of business law and regulation at the University of Calgary, laid out the problems with this method last year. According to Clements, one of the primary issues with stablecoins is that they can only work as long as there is demand for them; otherwise, all those incentives are useless. "UST was never completely collateralized and was never stable to begin with," Clements argues. "It necessitated a constant dependence on the idea that there would be adequate (ongoing) interest in the Terra ecosystem's different UST use cases."

Many cryptocurrency investors began to arrive at the door. One probable explanation for what occurred to UST, according to Bobby Ong, developer of cryptocurrency analytics platform CoinGecko, is a "George Soros-style" attack, referring to the Hungarian billionaire and financier's famous bet against the British pound in 1992. According to this idea, UST's disastrous decline—which began on Monday and culminated in a disaster on Wednesday—was prompted by a huge entity dumping billions of UST on the market, causing its peg to be shattered. Another, more straightforward explanation is that UST was just unsustainable, and this was bound to happen as soon as market sentiment shifted.

It's telling that certain crypto personalities are blaming investment management firm BlackRock and hedge fund Citadel for the alleged attack. Citadel had already been branded as the villain in another financial craze, the so-called GameStop debacle, when millions of retail investors began buying the struggling game shop chain's stock in droves, despite its doubtful fundamentals, in an unusual act of defiance against traditional finance. Several commentators hailed the rise of meme finance, in which asset values were determined by communal delusions, performative contrarianism, and simple nihilism rather than commercial potential ("Is [GameStop's stock] worth 200+ dollars? That's up to you to decide depending on your own set of values," one investor said on Reddit, where the revolt began.)

Terra's rise and fall are, in some ways, the culmination of that long period of strange finance. It is possible that it will not rebound and will instead follow in the footsteps of earlier Web3 downturns, such as the bursting of the NFT bubble or the collapse of a large number of meme stocks and dog coins.

But reading all of this through the lens of absurdism and pipe dreams would be deceptive. Terra's meteoric rise in popularity in the last six months has also been fueled by incredible incentive programs. "A savings system dubbed Anchor on Terra's blockchain, which offered a 20% annual percentage interest, drove the high demand for UST," explains Ong. People would buy UST and save it in Anchor, a piece of software that allowed them to store their coins and watch them grow over time like a magical money tree. What's more concerning, according to Ong, is that Terra set an example for a slew of other crypto enterprises that began promising outrageous profits but are now in grave danger of collapsing.

The Ponzinomics were too obvious: When you buy money for nothing and put it in a protocol with the hope of getting a 20% yield, all you get is 20% of nothing.

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Saylor's bitcoin evangelizing has contributed to his status as an A-lister in the community. Throughout the Bitcoin 2022 conference, Saylor would go around the Miami Beach Convention Center, trailed by a swarm of enthusiasts eager for a selfie with him.

Blue chip CEOs look to MicroStrategy's CEO for guidance on corporate adoption.

MicroStrategy has utilized company debt to buy bitcoin, and in March, Saylor took another step toward normalizing bitcoin-backed finance by borrowing $205 million and using his bitcoin as security – to subsequently buy more of the cryptocurrency.

"We've got $5 billion in collateral." We took out a $200,000 loan. So I'm not advising folks to take out a high-leverage loan. "What I'm doing, I believe, is trying my best to pave the road and standardize the bitcoin-backed financing business," Saylor said, adding that publicly traded crypto miner Marathon Digital also took up a credit line with Silvergate Bank.

"As individuals understand they can borrow against something, they realize they never have to sell it, and they start to stretch their time horizon from 'It's a 36-month speculation,' to 'It's a 36-year holding," Saylor explained to CNBC.

See you on the Otherside in April. Powered by @apecoin pic.twitter.com/1cnSk1CjXS

— Yuga Labs (@yugalabs) March 19, 2022

ApeCoin demand may rise as a result of this potential use-case, which could explain APE's recent upward trend. The NFT collection will also be celebrating its first year anniversary on April 23rd, which could coincide with the launch of the Metaverse project.

Given that several well-known names presently own one of these premium digital assets, Bored Ape Yacht Club NFTs have undoubtedly captured the public's attention. ApeCoin's introduction has added another ape-based commodity to the crypto market, capturing investors' attention in the hopes of outperforming the market.

According to CNBC, Johnston went to check it out himself in early 2021 after watching his friends and colleagues leave.

"I responded, 'Wow, okay, I understand it,'" says the author. Johnston recounted his initial impressions of the little island region, which can be driven around in half a day. "There are three million inhabitants on the island... This area is large enough to house a technology center."

Puerto Rico, according to Johnston, reminds him a lot of Austin in 2012. He believes the city felt small before Tesla, Samsung, and Apple helped convert it into one of the country's hottest innovation centres. However, Austin, like Puerto Rico now, had a lot of energy and a lot of passionate people moving in, which accelerated over time. Making the move to Puerto Rico, for Johnston, feels like getting in on the ground floor.

"That's where my neighborhood is." That's where my friends and family are going, and they're going to construct something wonderful. That's what I like about open source: it's something that helps regular people. That's one of the things I like about blockchain. "Everyone is welcome," he stated.

 

The perks of island living

Puerto Rico has quickly established itself as a new hotspot for the crypto community.

Frances Haugen, a Facebook whistleblower who told the New York Times she bought cryptocurrency "at the appropriate time," moved from San Francisco to Puerto Rico last year, partly to hang out with her "crypto buddies" on the island. Logan Paul, a controversial YouTube personality and NFT investor, as well as crypto billionaire Brock Pierce, a child actor (of "Mighty Ducks" fame) turned 2020 indie presidential candidate, set up shop there.

Meanwhile, Johnston claims that his entire office building is being taken up by start-ups and crypto firms.

"On the fifth story, there's Pantera Capital (a crypto fund), and on the sixth floor, there's a co-working area. My company, DLTx, occupied the eighth floor, while NFT.com occupied the twelfth. "All of this happened in the last year," Johnston tells CNBC.

Redwood City Ventures, a firm that invests in bitcoin and blockchain startups, has also established a presence in the United States.

For many, the main attraction to the island is Act 60, which provides large tax benefits to qualified inhabitants.

In the United States, short-term capital gains are taxed at up to 37% and long-term capital gains are taxed at up to 20%, which applies to bitcoin and other assets held for more than a year. If certain conditions are met, one of Act 60's tax advantages, known as the Individual Investors Act, reduces that tax obligation to zero. This is particularly significant for businesses and cryptocurrency traders.

There is also a significant tax advantage for businesses to establish themselves in Puerto Rico. Mainland businesses must pay a federal corporate tax of 21% plus a state tax that varies. A company that exports its services out of Puerto Rico, to the United States, or basically anywhere else, pays a 4% corporate tax rate.

Any gains made before landing in Puerto Rico are still subject to the usual capital gains tax rates on the mainland, according to CPA Shehan Chandrasekera. The gains made after becoming a Puerto Rican resident are the only ones that are tax-free.

"That's the aspect that no one is talking about," said Chandrasekera, who is the head of tax strategy at CoinTracker.io, a crypto tax software startup.

There is, however, a workaround.

If an investor has made a profit, they can relocate to Puerto Rico, obtain residency, sell their investment, and then repurchase it as a new position. They avoid muddying the waters by bringing over any gains from the United States in this way.

Build it and they’ll come

George Burke, a crypto investor, had been contemplating the move since 2018, but he eventually took the plunge last year.

"I realized I needed to make a shift after the performance of 2021 with bitcoin and the performance of my firm, so Puerto Rico became a really excellent alternative," Burke said.

Burke wouldn't give a specific cash amount to CNBC, but he did claim his crypto assets are in the mid-seven figure area. "I was at an ethereum crowd sale... Only about 6,000 individuals were able to accomplish that," Burke said, adding that he also worked on the first bitcoin debit card in 2013, according to CNBC.

Burke claims that the transition was relatively painless.

"I got on an aircraft, and I created my residency the same day I got off the airline by renting a room at a friend's house, and I started the clock," he explained.

Burke also stated that he was not required to apply prior to his arrival. He applied for the individual investor's exemption on his own, and he paid a lawyer $15,000 to assist him with the business exemption.

Johnston had a similar experience, claiming that going through all of the cursory evaluations took between six and nine months, though it "didn't take a significant amount of effort."

"I mean, it's America," Johnston explained. "You do not require a visa." You are not need to submit an application for residency. A passport is not required. You may simply take a domestic trip to San Juan, obtain a driver's license, purchase a home, and launch a business downtown."

He went on to say, "It was pretty smooth."

 

Inside Puerto Rico’s crypto clique

Theodore Agranat told CNBC that he understood very little about Puerto Rico before moving there, except from the idea that it was an American colony. When Hurricane Maria hit, he also remembered witnessing footage of former President Donald Trump throwing paper towels into a crowd.

However, after conversing with friends who had made the move and taking a scouting trip himself this spring, the 45-year-old realized that Puerto Rico could be the kind of location he had been looking for since the birth of his first son in 2003: Agranat is part of a community of entrepreneur families with children that embraces home-schooling and alternative diets — he eats raw foods himself — while also acting as a start-up incubator, bringing together business-savvy and creative brains. In the southeast Puerto Rican city of Humacao, he discovered just that.

The financial incentives, according to Agranat, who leads an early-stage blockchain investment firm that invested in over 225 businesses last year.

So far, island living has proven to be a good fit.

Agranat and his wife homeschool their three children, and they've tailored the curriculum for their 14-year-old to incorporate crypto-related topics like NFTs, crypto games, and token trading.

Johnston, who lives in Guaynabo, a San Juan suburb, has taken a similar strategy. He and his wife homeschool their three children, and crypto has always been a part of the curriculum.

Johnston told CNBC, "My kids have had crypto wallets since they were born." "When Grandma tried to compensate them in cash for doing tasks for her, they answered, 'No thanks, Grandma.' 'Bitcoin is my preferred method.'

Many individuals congregate outside of the suburbs for Crypto Mondays, a weekly meet-up hosted at excellent hotels and restaurants in the capital, and Crypto Curious, which attracts newcomers to the industry and covers topics such as NFTs, DeFi, and how to open your own crypto wallet. Hundreds of residents have started to attend the sessions, which are now also available in Spanish.

Burke tells CNBC that he attends a luncheon every Thursday with roughly 30 to 40 other crypto-minded people who live in either Condado Beach or Old San Juan, and that his friends and crypto colleagues have been moving to Puerto Rico since the last bitcoin bull run in 2017.

Some locals aren’t happy

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