In reaction to the recent demise of the contentious crypto project Terra, the United Kingdom is investigating measures to ensure that stablecoins do not endanger the country’s financial system.
On Tuesday, May 31, 2022, Her Majesty’s Treasury published a new consultation document addressing how to avoid the dangers of the probable collapse of stablecoins and many other digital currencies by employing present government rules. Stablecoins are digital currencies that have a value lingking to a traditional asset, most often the US dollar.
The consultation document has different sections. First, it discusses how the U.K. The administration wants to assist digital currencies and will accept crypto stablecoins. Nevertheless, the report also states that it is critical to have safeguards in place to avoid any significant problems that may arise if a big stablecoin collapses.
As a result, the government states unequivocally that the UK’s financial services industry will be at the forefront of virtual asset technological innovation. It is implementing a tiered and appropriate approach to crypto asset regulation that is sensitive to risks and responsive to market developments. This strategy will initially focus on stablecoins due to their potential to become a widely used mode of payment.
The Proposed Method for Handling Stablecoin Risks
To protect customers against the liquidation of payment businesses for digital asset payments, regulatory bodies advocate implementing current government legislation.
The Bank of England should keep an eye on Stablecoin laws. Hence, they have the authority to supervise and decide who will become the head. As a result, they should enhance the organization’s distribution structure. According to the report, given the present norm, known as Special Administration Regimes.
Regulatory bodies utilize two types of SARs to reduce the risks connected with electronic payments. The first one is PESAR which stands for Payment as E-Money Special Administration Regime. Hence, the FMISAR, which stands for Financial Market Infrastructure Special Administration Regime, is the second.
As per a recent report, the administration intends to adopt legislation for FMI SAR with the consent of parliament. According to the newspaper, a response to the offer is anticipated until or before August 2, 2022.
There was a governmental move following the demise of LUNA Classic and its stablecoin TerraUSD. The stablecoin crashes in early May, losing $40 billion in market value and causing substantial damage to the entire crypto sector.
The event raised concerns among regulatory officials about the purported hazards that stablecoins pose to the financial system. They are also referencing the UST catastrophe briefly in the new consultation paper. Accordingly, events in the crypto asset markets underline the importance of effective regulation in order to assist in alleviating consumer, fair trading, and financial stability threats.
The UK government produces a discussion paper on stablecoins. This highlights the recent UST crisis as a rationale for regulation. Consequently, it is unclear how severely they will regulate stablecoins. Nonetheless, the study claims that this occurrence has emphasized the need to protect consumers, markets, and financial stability threats.
