Why Crypto Needs Rules, Not Rulers

With the recent sentencing of Do Kwon, the man behind the catastrophic $40 billion collapse of the TerraUSD (UST) and Luna ecosystem, the crypto scene has its latest reminder of why regulatory controls are so necessary in the digital asset industry, and how dangerous the actions of one person can be. As the legal system finally catches up with one of the most significant financial disasters in crypto history, it’s clear that the old ‘wild west’ approach taken by many big personalities in the crypto space is a recipe for systemic failure which ends up hurting everyone in the crypto ecosystem.

The $40 billion wipeout of TerraUSD didn't just affect Luna holders though; it triggered a domino effect that brought down hedge funds such as Three Arrows Capital, and lenders like Celsius and Voyager, eventually contributing to the fall of FTX and the global impact that had on the crypto markets. With this in mind, it should be easy to see why regulatory measures - particularly those aimed at reserve requirements and capital adequacy - are vital. If stablecoins are required to prove their backing through third-party audits, the failures witnessed with UST become far less likely, and by regulating the interconnectedness of crypto firms, authorities can prevent one failure from becoming a systemic meltdown.

More broadly, clear regulatory frameworks and adherence to them are the cornerstone of the next era of blockchain for both users and businesses. The impact of poor regulations, or flouting regulations, is easy to see for businesses, and Do Kwon is only the latest in a line of cautionary tales of people who thought themselves above the law. For users in the space, it’s clear that better regulation provides a safer environment where investments are protected, but it’s also worth considering the benefit to the wider ecosystem, as with increased protections comes the reduced volatility of digital assets, with global market reactions to events such as the Terra/Luna collapse avoided.

For the millions of individual investors who lost their life savings in the Terra collapse, the lack of oversight led to devastating consequences. In this case in particular, regulatory measures to protect users can be seen as important in several key ways:

• Transparency and Disclosure: Providing clear, auditable and transparent information about the nature of Terra would have highlighted dangers early on and allowed people to avoid investing in such an unstable and unsustainable platform.
• Fraud Prevention: The prosecution of figures like Do Kwon sends a powerful message that the blockchain is not a law-less vacuum. Stronger regulations empower authorities to identify and halt fraudulent schemes before they reach such a vast financial scale.
• Recourse and Insurance: In traditional finance, FDIC insurance and consumer protection laws provide a safety net. Regulatory evolution in crypto seeks to establish similar standards, ensuring that if a platform fails, users aren't simply left with a balance of zero and no legal standing like many in the fall of Terra/Luna and others failures like it.

Whilst some may rail against regulations, and claim that they stifle innovation, clear rules are actually a great catalyst for business growth. For legitimate blockchain enterprises, regulation provides a number of benefits:

• Legal Certainty: Defined frameworks allow developers and entrepreneurs to build with confidence, knowing their business models are compliant with the law and that they themselves are protected if they follow the rules.
• Institutional Trust: Major banks, pension funds, and corporations are hesitant to enter a market that lacks oversight. Comprehensive regulation bridges the gap between crypto and traditional finance, allowing for the massive influx of capital necessary for blockchain to be adopted at scale and solve real-world problems.
• Leveling the Playing Field: Regulation prevents bad actors from gaining an unfair advantage through market manipulation, wash trading, or deceptive marketing. This ensures that the projects that succeed are those with the best technology and utility, not those with the most effective con artists behind the wheel.

The sentencing of Do Kwon will hopefully be a closing chapter on an era of recklessness, but it could also mark the opening of a more mature phase for blockchain, where the goal of regulation is realised to not be a strangling vine that stifles the technology, but to prune the rot so the ecosystem can grow. For the industry to move forward, the focus must shift from avoiding the law to working with it. When users feel safe and businesses feel certain, blockchain can fully realise its potential as a foundational infrastructure of the digital economy. The collapse of Terra was a $40 billion lesson; the rise of a regulated, transparent crypto market will be the prize for learning it.