What happened was that 3AC made several large directional trades in Grayscale Bitcoin Trust (GBTC), Luna Classic (LUNC) and Staked Ether (stETH), and on top of that, borrowed funds from over 20 prominent institutions. Thus, 3AC was highly vulnerable to the May crypto crash, and as expected, it led to a series of spiral investment collapses for the hedge fund. As the firm went bust, the loan defaults led to mass contagion in crypto.
It was the series of liquidations for 3AC that had a catastrophic impact on crypto lenders such as BlockFi, Voyager and Celsius. Centralized crypto lender Celsius filed for bankruptcy protection after it failed to keep enough liquidity to honor customer redemptions.
In the aftermath, the US Securities and Exchange Commission (SEC) is now taking enforcement action against crypto companies and considering new rules. The US Treasury Department is calling on Congress to devise regulations for the stablecoin ecosystem. "Uneven regulation, supervision, and compliance across jurisdictions creates opportunities for arbitrage and raises risks to financial stability and the protection of consumers, investors, businesses, and markets," the Treasury said in a statement. The Financial Stability Board (FSB), a group of regulators from the G20 nations, is also planning to establish "strong" worldwide standards for crypto.
The positive side
Because of the enormous attention and media coverage that crypto attracted, 2021 was a breakthrough year for the industry. And while the failure of a handful of companies had far-reaching effects, which showed that the so-called "smart money" was not so smart after all, there has been a blessing in disguise even in this debacle.
The domino effect of the Terra crash and 3AC and Celsius bankruptcy has given federal regulators more ammunition to push for crypto regulation. The crypto space lacks clarity. Lawmakers not only in Washington but across the world are having discussions over how to establish laws and guidelines to safeguard crypto investors and prevent cybercriminals from using digital assets for illicit activities. US officials are showing particular interest in stablecoin regulation.
Clear regulation means the removal of a significant roadblock for the industry, particularly in the US, where investors and firms are operating without clear guidelines. Industry experts see this as a good thing for crypto as more regulation could mean more stability in a volatile market. Sensible regulation that strikes the right balance also has the potential to protect long-term investors, prevent fraudsters from abusing the crypto ecosystem for illicit activities, and provide clear guidance to allow companies to innovate in the crypto economy.
On the adoption front, mainstream companies across multiple industries such as PayPal, AMC, Square, Barclays, Schroders and Tesla, to name a few, have already started coming in. This inflow of bigger, global corporations can propel adoption even further. Increased institutional adoption could bring more options for everyday users. The more "real world" uses it has, the more likely demand for and the value of crypto will increase.