UK Treasury Strengthens Regulations Around Stablecoins Following UST Collapse

In response to the recent collapse of controversial crypto project Terra, Britain is looking into ways to ensure stablecoins don’t threaten their wider financial system.

Her Majesty’s Treasury printed a new consultation paper on Tuesday, May 31, 2022, regarding minimizing the risks of the possible collapse of stablecoins and many more digital currencies by utilizing the current government regulations. Stablecoins are digital assets whose value is linked to a conventional asset, often the U.S. dollar.  

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The consultation paper has three parts. First, it talks about how the U.K. government wants to help digital currencies and how they will accept crypto stablecoins. However, the paper also says that it is essential to have measures in place to prevent any serious problems that could happen if a large stablecoin fails.

The Proposed Approach To Handle Stablecoins Risks

The regulatory authorities recommend enforcing the current government regulations to save consumers from the liquidation of payment firms for digital asset payments. The paper suggests that given the current rule, called Special Administration Regimes, the Bank of England possessing “power of direction over an appointed director” should control the regulations over stablecoins and strengthen the disbursement structure organizations.

There are two types of SARs that regulatory authorities use to minimize the risks associated with digital payments. These are the payment and E-Money Special Administration Regime (PESAR) and The Financial Market Infrastructure Special Administration regime (FMI SAR).

According to a recent paper, the government plans to pass legislation for FMI SAR after parliament’s approval. The report states that feedback on the offer is expected until or before August 02, 2022.

The regulatory action came after the collapse of LUNA Classic and its stablecoin called TerraUSD (UST). The stablecoin collapsed in early May and lost $40 billion of its market value, leading to a significant loss to the whole crypto space.

The incident caused concern among the regulating authorities against the alleged risks presented by stablecoins to the financial system. The UST crash is also briefly mentioned in the new consultation paper, reporting that,

Events in crypto asset markets have further highlighted the need for appropriate regulation to help mitigate consumer, market integrity, and financial stability risks.

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The U.K. government has published a consultation paper on stablecoins, mentioning the recent UST crash as a reason for regulation. However, it’s not clear yet how harshly they will regulate stablecoins. Still, the paper states that this event has highlighted the need to protect consumers, markets, and financial stability risks.

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