Systemic Risks and Accountability in Crypto Market-Making: Regulatory Evolution and Firm Risk Exposure Post-Terra Collapse

The collapse of TerraUSD (UST) and its sister token Luna in May 2022 marked a watershed moment for the cryptocurrency market, exposing systemic vulnerabilities in algorithmic stablecoins and triggering a global reevaluation of regulatory frameworks. In the aftermath, policymakers and market participants have grappled with balancing innovation and stability, leading to the emergence of comprehensive regulations like the U.S. GENIUS Act and the EU's Markets in Crypto-Assets (MiCA) framework. This article examines how these regulatory shifts are reshaping systemic risk management and accountability in crypto market-making, while analyzing the evolving risk exposure of firms operating in this space.

The Terra Collapse: A Catalyst for Regulatory Overhaul

The Terra collapse revealed critical flaws in the design of algorithmic stablecoins, which relied on complex algorithms rather than traditional collateral to maintain their dollar peg. As UST lost its peg, the resulting liquidity crisis cascaded through the broader crypto market, causing billions in losses and eroding trust in digital assets. Institutional investors, previously bullish on crypto, began prioritizing risk mitigation strategies such as enhanced due diligence, portfolio diversification, and liquidity management.

This crisis underscored the need for robust governance and transparency, prompting regulators to act. The Bank for International Settlements (BIS) issued guidance in July 2022 advocating for a "same risk, same regulation" approach, aligning stablecoin oversight with international financial infrastructure standards. By 2025, this momentum culminated in the U.S. passing the GENIUS Act, the first federal framework for stablecoins, and the EU finalizing MiCA, creating a global regulatory convergence.

Regulatory Evolution: GENIUS Act and MiCA

The GENIUS Act, enacted in July 2025, introduced a suite of measures to mitigate systemic risks:
1. Reserve Backing Requirements: Stablecoins must be fully backed by high-quality liquid assets (HQLA) such as cash, U.S. Treasuries, or overnight reverse repurchase agreements according to the new regulations.
2. Transparency and Audits: Issuers are mandated to publish monthly reserve disclosures and undergo third-party audits as required by the Act.
3. AML and Consumer Protections: Anti-money laundering (AML) obligations and restrictions on interest payments to stablecoin holders were enforced according to regulatory updates.

Similarly, the EU's MiCA regulation, operationalized in 2025, imposed comparable reserve requirements, redemption rights, and bans on algorithmic stablecoins. Both frameworks aim to prevent depegging events and liquidity crises by ensuring stablecoins function as reliable payment instruments rather than speculative assets according to industry analysis.

These regulations have created a more predictable environment for institutional participation. For instance, major stablecoin issuers like Circle and Paxos announced compliance programs to meet 100% reserve backing and monthly disclosure mandates. Meanwhile, traditional financial institutions such as JP Morgan and Meta are exploring stablecoin issuance under these frameworks, signaling a shift toward corporate-backed digital assets.

Firm Risk Exposure and Accountability Mechanisms

Crypto market-making firms now face heightened accountability under these regulations. The GENIUS Act's reserve requirements and audit mandates have increased operational complexity, exposing firms to disputes over redemption rights, reserve disclosures, and contractual obligations. For example, non-compliant tokens faced a "fiscal cliff" under MiCA, with EU exchanges required to delist them by December 30, 2024. This has forced market participants to adopt robust governance frameworks and align service agreements with regulatory definitions according to industry reports.

Case studies highlight the adaptability of firms. Binance and FTX, which faced governance failures during the Terra crisis, now emphasize transparency and compliance in operations. Additionally, market-making firms are prioritizing cross-border coordination to navigate divergent U.S. and EU regulatory philosophies. While the GENIUS Act prioritizes innovation and market entry, MiCA emphasizes upstream transparency, creating operational challenges for firms operating in both jurisdictions.

Systemic Implications and Market Dynamics

The regulatory clarity provided by GENIUS and MiCA has driven institutional adoption, with stablecoin market capitalization briefly surpassing $4 trillion in 2025. However, systemic risks persist. The U.S. model, which allows foreign issuers to access U.S. markets without local subsidiaries, introduces vulnerabilities under redemption shocks, with failure probabilities exceeding 8% even with conservative reserve ratios. Conversely, MiCA's harmonized ex ante regulation has slowed adoption but enhanced investor confidence through standardized safeguards.

Global regulatory divergence remains a challenge. While 70% of jurisdictions advanced stablecoin frameworks in 2025, inconsistencies in standards implementation persist, increasing the risk of financial crime and market instability. International bodies like the Financial Action Task Force (FATF) and Financial Stability Board (FSB) have called for transatlantic coordination on reserve standards and liquidity backstops to mitigate these risks.

Conclusion: A New Era of Accountability

The post-Terra regulatory landscape reflects a paradigm shift from enforcement-driven oversight to proactive, structured frameworks. While the GENIUS Act and MiCA have enhanced transparency and accountability, they also introduce compliance complexities and systemic trade-offs. For investors, the key takeaway is that crypto market-making is entering an era where regulatory alignment and institutional-grade governance will determine long-term stability. As the industry navigates this evolution, firms that prioritize adaptability and compliance will likely thrive, while those clinging to opaque models risk obsolescence.