UK proposes bolstering safeguards over stablecoin failures

HM Treasury outlines additional powers for Bank of England to deal with failed stablecoins

Sign for HM Treasury on the exterior of a building                                 
HM Treasury in the UK is proposing extra safeguards in relation to the future collapse of stablecoin operators – Photo: Alamy
                                

The collapse and depegging of the stablecoin terraUSD (UST) has led the UK’s Treasury to propose extra safeguards to protect against the possible collapse of stablecoins in the future.   

A government consultation paper on the matter recommends making amends to existing legislation to tackle such risks by giving the Bank of England (BoE) additional powers.

The paper labels this to be of “systemic importance” and comes as the UK announced in March – before the collapse of UST – it is considering regulating stablecoins.

The Treasury said: “Since the initial commitment to regulate certain types of stablecoins, events in crypto asset markets [depegging of UST] have further highlighted the need for appropriate regulation to help mitigate consumer, market integrity and financial stability risks.”

FCA to raise issue of UST soon

The UK’s Financial Conduct Authority (FCA) is planning to discuss the UST incident with the Treasury in the coming months.

These proposals mean the Financial Market Infrastructure Special Administration Regime (FMI SAR) would be amended to include risks brought about by the potential failure of stablecoins.The Treasury plans to make the FMI SAR the default framework for the issues surrounding failed stablecoin projects.

Under the proposals, the BoE would ensure that a failed stablecoin issuer takes priority over the interests of creditors.The BoE would then consult the FCA prior to seeking a special administration order regarding the stablecoin business.

In April, the Treasury suggested that stablecoin issuers that could pose a systemic risk to financial stability should fall under the BoE’s responsibility and the FCA would be responsible for smaller stablecoin projects.  

“Further work will be required to consider whether it would be appropriate to put in place a bespoke legal framework for the failure of such firms and, if so, its design,” added the Treasury in the consultation document. 

Feedback to the consultation paper is required by 2 August.

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