Stablecoins face UK regulation after UST collapse

By on May 31, 2022 0

Key points to remember

  • The UK government wants to address the risks associated with stablecoins.
  • A new consultation paper argues that existing regulatory regimes can be applied to unregulated digital payment assets.
  • The new proposal comes after the collapse of the UST stablecoin earlier this month, which cost investors billions.

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The UK government has released a paper exploring ways to alleviate financial stability issues associated with digital payment assets. The development comes after UST, previously the third-largest stablecoin, collapsed earlier this month.

UK Government Responds to Stablecoin Concerns

The UK government is making further progress in regulating stablecoins.

In a new consultation paper released on Tuesday, Her Majesty’s Treasury proposed using existing regulatory regimes to help reduce the risks associated with the potential collapse of stablecoins and other digital settlement assets.

The three-part document began by reiterating the UK government’s commitment to cryptocurrency innovation and its intention to recognize crypto stablecoins as a means of payment in law. However, to achieve this vision, the document states that it is “necessary to ensure that appropriate and proportionate tools are in place to mitigate the financial stability problems that could materialize in the event of the failure of a company having reached a systemic scale.

The government’s proposed solution is to use existing regulatory regimes to protect consumers against the insolvency of digital settlement asset payment companies. The existing rules, known as Special Administration Schemes (SARs), would give the Bank of England ongoing regulatory oversight over stablecoin issuers and verify that their payment infrastructure systems are robust. They would also ensure businesses make decisions that are in the best interests of their customers and the British public.

Currently, two types of SAR are used to help mitigate the risks associated with digital payments: the Financial Market Infrastructure Special Administration Scheme (FMI SAR) and the Electronic Payments and Money Special Administration Scheme (PESAR). The document argues that the IMF SAR would be the most appropriate and states that the government intends to legislate as such when parliamentary time permits. The report also invites comments on the proposal with a deadline of August 2.

In early May, the crypto market suffered a sharp decline caused by the collapse of Terra’s UST algorithmic stablecoin. UST first deviated from its dollar peg on May 9, and within 72 hours it crashed more than 50%, costing investors billions, as its associated LUNA token also fell. The event sparked a debate over the security of stablecoins, with regulators in the United States and around the world weighing in on the collapse.

Today’s consultation paper also makes a vague reference to the UST crash, stating that “events in the crypto-asset markets have further underscored the need for appropriate regulation to help mitigate risk for consumers, market integrity and financial stability”. While the collapse of the UST no doubt acted as a catalyst for the UK government to act on stablecoins, the document did not specify whether this would influence the stringency of its regulatory policy.

Disclosure: At the time of writing this article, the author owned ETH and several other cryptocurrencies.

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