Stablecoins Face U.K. Regulation Following UST Collapse

The U.K. government has published a paper exploring ways to mitigate the financial stability issues associated with digital payment assets. The development comes after the collapse of UST, previously the third-largest stablecoin, earlier this month.

U.K. Government Addresses Stablecoin Concerns

The U.K. government is making further progress toward regulating stablecoins. 

In a new consultation paper published Tuesday, Her Majesty’s Treasury has 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 paper started by reiterating the U.K. government’s commitment to cryptocurrency innovation and its intention to recognize crypto stablecoins as a means of payment in law. However, to realize this vision, the paper argues that it is “necessary to ensure appropriate, and proportionate, tools are in place to mitigate the financial stability issues that may materialise should a firm that has reached systemic scale fail.”

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

Currently, two types of SARs are used to help mitigate digital payment risks: the Financial Market Infrastructure Special Administration Regime (FMI SAR) and the Payment and E-Money Special Administration Regime (PESAR). The paper argues that the FMI SAR would be the most appropriate and states that the government intends to legislate as such when parliamentary time allows. The report also invites feedback on the proposal with a deadline of Aug. 2.

At the beginning of May, the crypto market suffered a sharp drawdown caused by the collapse of Terra’s algorithmic UST stablecoin. UST first deviated from its dollar peg on May 9, and within 72 hours, it had crashed by over 50%, costing investors billions as its associated LUNA token also plummeted. The event sparked debate about the safety of stablecoins, with regulators in the U.S. and worldwide weighing in on the collapse. 

Today’s consultation paper also makes a loose reference to the UST crash, stating that “events in cryptoasset markets have further highlighted the need for appropriate regulation to help mitigate consumer, market integrity, and financial stability risks.” Though the UST collapse has doubtless acted as a catalyst for the U.K. government to act on stablecoins, the paper didn’t clarify whether it would influence the severity of its regulation policy. 

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