UK government has outlined amending current rules to mitigate “systemic” risk posed by stablecoins firms and wants to ensure that the dramatic fallout of the Terra project does not seep into the wider financial system.
TerraUSD, a so-called “algorithmic” stablecoin, crashed earlier in May, taking its sister token Luna with it. Since then the entire crypto market is engulfed in panic, erasing hundreds of billions of dollars from it.
Even Tether, the world’s biggest stablecoin, saw its circulating supply plunge from a record $84 billion on May 11, fueling fears of a 2008-style “bank run” with knock-on effects for other financial markets.
That has, in turn, caused concern for regulators, who are worried about the risks posed by stablecoins to the broader financial system.
It is to be noted that the latest plan is different from previously announced plans to regulate stablecoins under laws governing electronic payments. The government said in a consultation paper setting out its proposals.
“Since the initial commitment to regulate certain types of stablecoins, events in crypto-asset markets have further highlighted the need for appropriate regulation to help mitigate consumer, market integrity, and financial stability risks.”
“The government considers that it is important to ensure existing legal frameworks can be effectively applied to manage the risks posed by the possible failure of systemic DSA [digital settlement asset] firms for the purposes of financial stability.”
UK’s Bank of England Will Be Given More Power
In addition to that, the UK authorities are working to implement additional safeguards to existing legislation around the insolvency of firms operating key financial market infrastructure. Such a provision would take into account the return or transfer of the private keys that protect users’ funds.
The Bank of England would serve as the lead regulator enforcing the rules. A consultation on the proposal is currently in progress and will close on Aug. 2.
Not only in the UK but Regulators around the world are also working towards bringing effective regulatory controls. Recently Chinese state media outlet, the Economic Daily, has signaled that the Chinese government may introduce even tighter regulations on cryptocurrencies and stablecoins due to the collapse of the Terra ecosystem.