Senator Cynthia Lummis is using the dramatic failure of the Terra cryptocurrency platform – which lost around $40 billion in 2022 – as a key example to support her proposed CLARITY Act. In a recent post on X (formerly Twitter), she explained that the bill would offer important protections for everyday crypto investors.
The failure of Terra resulted in about $40 billion in losses, with bankruptcy proceedings consuming much of what was left, according to Senator Lummis. The proposed Clarity Act aims to clearly distinguish between stablecoins backed by reserves and those relying on algorithms. Crucially, it also seeks to protect customers by ensuring their assets aren’t used to pay off creditors if a project fails.
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A Deliberate, Day-By-Day Campaign
This isn’t an isolated incident with Terra; it’s part of a deliberate campaign. Senator Lummis is systematically highlighting failures within the crypto industry – examining each troubled project – to support her argument for consumer protection legislation currently stalled in the Senate.
On July 20th, she referenced the bankruptcies of Celsius and Voyager Digital, explaining that when these companies failed, customer funds weren’t protected as deposits. Instead, they became part of a larger pool of assets used to pay off creditors – people who may not have even known the original depositors.
She went back to Voyager on July 21st, explaining that the CLARITY Act might stop similar problems from happening again. And now, Terra.
Over just three days, a series of unfortunate events and intense debate unfolded, all happening right before the Senate’s summer break. This timing was deliberate – an effort to shift the focus of a bill bogged down in ethics concerns and portray it instead as protection for everyday investors.
What Terra Actually Was
Just as a reminder, Terra wasn’t like companies such as Celsius or Voyager that simply lent out money. It had a fundamental design problem with how it worked, and Senator Lummis is using it to illustrate this point. Terra used two cryptocurrencies – TerraUSD (UST), a ‘stablecoin’ intended to stay at $1 in value, and LUNA. Unlike traditional stablecoins backed by cash reserves, UST tried to maintain its price by automatically creating or destroying tokens based on demand.
As a researcher following the crypto space, I remember May 2022 vividly. That’s when the system behind the TerraUSD (UST) stablecoin failed. UST lost its intended value, and a rapid loss of confidence led to a massive increase in the supply of LUNA, its sister token. This created a downward spiral, and both tokens essentially became worthless in a matter of days. We estimate around $40 billion disappeared, impacting everyday investors globally and contributing to the failures of major firms like Three Arrows Capital, Celsius, and Voyager – the same platforms Senator Lummis had mentioned just the week before. Terra’s co-founder, Do Kwon, was eventually extradited to the US and pleaded guilty to fraud. The whole event stands as a stark warning about the risks of stablecoins not backed by sufficient reserves.
The Two Protections Lummis Is Selling
Lummis believes the Terra case perfectly illustrates both sides of the regulatory approach she’s advocating for.
Stablecoins fall into two main categories: those backed by reserves and those relying on algorithms to maintain their value. The recent failure of UST highlighted a key issue – it wasn’t supported by any real assets. A new law called the GENIUS Act addresses this, requiring payment stablecoins to be fully backed by cash or short-term government bonds, which essentially bans the algorithmic approach that led to Terra’s collapse. Senator Lummis believes GENIUS is a good start to protecting the dollar’s position and sees another proposed bill, CLARITY, as a necessary addition to create a complete regulatory framework.
A key part of her plan focuses on how bankruptcy cases are handled. After the collapse of Terra, even people who rightfully owned assets had their funds frozen and tied up in legal battles with creditors. The CLARITY Act, specifically Section 701, aims to fix this. It would change the bankruptcy code to clearly state that digital assets belong to customers, not to the bankrupt company. This would give crypto the same protections that stocks and commodities already have when a brokerage firm fails. Section 701 would also prevent companies from using legal loopholes or mixing funds to claim customer assets as their own, guaranteeing that your crypto remains yours even if the platform you use goes bankrupt.
Why It Matters
Senator Lummis is strategically shifting the focus of her crypto bill to increase its chances of passing. Currently, debate has centered on concerns that the CLARITY Act could allow officials like former President Trump to personally profit from cryptocurrency – a concern that’s lowered predictions of its passage to around 35%. Now, Lummis is highlighting the failures of companies like Terra, Celsius, and Voyager to emphasize the financial damage suffered by everyday investors. She hopes this will sway undecided lawmakers by demonstrating the real-world harm caused by the current lack of regulation and reminding them of the billions lost.
Beyond the headlines, there’s a solid argument at the heart of this issue. The part of the bill dealing with bankruptcy and ownership – Section 701 – is widely supported by both parties. Almost no one wants to defend a system where everyday bank customers lose money to unknown creditors. This provision is likely to survive even difficult debates. The bigger question is whether this single point is enough to get the entire, and often criticized, bill passed before the break. However, by highlighting the $40 billion loss with Terra, Senator Lummis is clearly demonstrating the real consequences of doing nothing.
2026-07-22 15:34